Defining Hard Money vs. Conventional
When doing deals in real estate investing, the time could come when you need to borrow funds to buy, fix and sell a property for a profit or to buy and hold it as a rental. In either situation you can either borrowing the funds from a traditional lending institution, such as a bank or mortgage company, or from private and/or hard money lenders.
In this article I am going to break down the pros and cons associated with each, along with the details of each lending situation.
- Traditional/Conventional Lenders – These are typically banks and mortgage brokers who require an approval process that can be very involved and sometimes extensive. It involves pulling a credit report for your current credit score, a thorough screening of your current and past financial status, and an evaluation of your total net worth and the cash value of your assets. You need to provide a number of supporting financial documents to show the lender that you are not only qualified but also highly capable to pay back the loan as well as the 10% or larger down payment. This screening process can most often take several weeks to accomplish. Despite these lending standards, an investor might choose this type of loan because of its much lower interest rate (typically below 6-7%) with much longer terms, such as 20-30 year loans.
- Private and Hard Money Lenders – These are the lenders that real estate investors take advantage of the most. Private money lenders are typically individuals that loan their own money from their own accounts and assets. They usually charge a higher interest rate and points in accordance with what they believe is their risk in the deal. Hard money lenders are more often a group of investors that have pooled their resources to be part of a bigger group. One of the biggest reasons a real estate investor would consider borrowing from either of these two types of lenders is because of the simpler lending requirements. In the case of the conventional lenders, they first look at the financial status of the borrower more than the property. In the case of the private/hard money lenders, they look at the numbers in the deal as well as its profitability. These lenders can provide funds in less than 30 days on a regular basis and in some cases less than 14 days. This alone is one of the reasons this type of lending is so attractive to investors who buy, fix and sell properties. Despite the much higher rates (such as 8% and higher), the terms are usually much shorter and in most cases less than 12 months. Under these considerations investors that are rehabbing properties find this acceptable as they are usually on a much shorter time frame, around 90 days to 6 months, from close to close.
It is always to your advantage to look at all options when it comes to borrowing funds for deals. Always look at your budget and the direction you want to go before deciding which lender better fits your needs.