No Time To Wait For A Traditional Mortgage, Consider A Hard Money Real Estate Loan

If you are an experienced real estate investor, or you are just thinking about getting into the real estate investing business, you probably know that really good deals usually do not last very long. Those that are able to put financing in place the fastest often have an advantage in getting the deal done. While traditional loans take time to get approved, there are other ways to get the financing that you need. One of these ways is a hard money real estate loan.

What Is A Hard Money Real Estate Loan?

Simply put hard money, or private money loans, are simply funds that comes from non-traditional sources such as sites like These sources are often private lenders, or small lending companies who are willing to loan you money for the project that you are considering. These funds are usually obtained at a much higher interest rate than you will find with traditional lenders, but the lenders are usually more lenient about who they lend to.

Lenders focus less on credit worthiness, and more on ensuring that the loans are secured with more than an adequate amount of property in order to reduce their amount of risk. Because of these relaxed lending requirements, you are often able to obtain funds much quicker than you would be able to if you were seeking these funds from a traditional source. 

When Hard Money Loans Make Really Good Sense

As previously stated, hard money loans often come at a higher cost than a traditional funds, but this does not mean that this is a funding source that you want to exclude from your funding portfolio. There are times that this type of funding makes perfect sense.

  • Hard money loans are a great sense of funding when you are in a hurry. Many times there is a lot of competition to really good real estate deals. Although you can make an offer, many sellers are not going to wait several weeks or longer for you to secure funding.  
  • Hard money loans may offer you more money than you will be able to secure through other sources. Hard money loans have a much lower loan to value (LTV) ratio than traditional funding. What makes this a positive attribute for these types of loans is their value is calculated on is the after repair value (ARV), and not the current value of the property. This is different from a traditional lender whose funds will be based on a percentage of the purchase price, or current value of the property.

This will often allow you to not only borrow the purchase price, but the renovation costs as well. Let's look at the following example of the following house:

The purchase price of the house is $80,000. The house needs $50,000 worth of renovations, but once the project is completed, the home will be valued at $180,000.

Most traditional lenders will only offer you 80% of the purchase price of an investment property. This means that you will have to come up with $16,000 or more of the purchase price, and then secure a rehab or construction loan for the other $50,000, which may cost you another 20% or $10,000. This means that to get the project completed, you may have to come out of your pocket with as much as $26,000. 

With a hard money loan, the lender may only be willing to loan you 70% of the ARV of the home. This will result in you receiving $180,000 x 70%, or 126,000. This would give you the $80,000 you need to purchase the home, as well as $46,000 you need towards your renovations. You would only have to have $4,000 out of pocket to complete your project.