Property investment is a great way to create cash flow and passive income. Although many people want to get started on this type of business, it can be very difficult if you have no capital available to you. If you have ever attended any real estate investment course, you will be aware that trainers often tell you that you can get involved in property investment without funds, as you can use other people’s money. They say this as there are ways you can get loans to make your investment.
Some of the ways to obtain money for your investments include asking family and friends, using traditional mortgage lenders or hard money loans. The type you go for will depend on your unique situation. Even though ideally, individuals should invest with the money they actually have, this may not be possible. Borrowing money to invest enables you to start building your property portfolio and as long as you know what you are doing, you will be able to make a profit. This article will explore what hard money loans are and when it makes sense to use them in real estate investments.
What is a Hard Money Loan?
If you are a property investor, whether as a beginner or an expert, you will be aware that you require capital to fund your deals. Although there are many ways you can get money, this does not mean that everyone is suitable for your needs and plans. A hard money loan is a way that you can fund your real estate, where you do not require traditional mortgage lenders. This money usually comes from investors who may lend you money based on the real estate deal you are making. However, a hard money loan is not for everybody, and below we discuss some of the situations in which it makes sense.
For Properties in Poor Condition
If you see a property that is in poor condition, you may struggle to find a lender that will approve funding for the deal. This is because in most cases, a surveyor will need to assess the condition of the property before the loan can be approved. This is to safeguard that you will be able to refinance the property and repay your loan. If you do not get a loan approved on the basis that the condition of the property is poor, a hard money loan may be a smart choice.
When you Require Flexibility on Agreements
Traditional loans can be very strict in terms of how you pay them back. They may require you to pay a fixed amount for a fixed period, and failure to do this can incur additional interest. If you live in Massachusetts, for example, and you are unsure whether your real estate deal will be profitable, it may be a good idea to use hard money lenders in Massachusetts as they offer increased flexibility. You will personally make payment arrangements and this can be reviewed and rearranged as required, as long as you have built a positive relationship with the lender.
If You Have Low Credit Score
One of the main reasons many people get loans refused is simply due to a poor credit score. These simple checks usually help the assessor determine your financial literacy before they approve you for a loan. You may have made a few mistakes financially throughout your years (or simply have not taken enough risks!) that may have resulted in a poor credit score. Getting a loan with low credit scores is usually very difficult, which is why hard money loans may be useful. Lenders of this type do not usually require credit checks.
When Speed is a Priority
As we mentioned above, hard money investors do not usually perform background checks on you or your credit. This makes the process much easier. Traditional lenders may review your financial situation and assess whether you are a liability, to conclude whether you will be able to repay your loan promptly. Hard money loans also expect to receive the money-back, although once you have built a relationship with them, this becomes much easier.
For Short-Term Loans
Hard money loans are usually more suitable for short-term projects. As a property investor, you may be aware that there are a diverse amount of strategies available that you can use. Although most of these are long-term as you do not see major profits quickly. Hard money loans work best for short-term strategies such as flipping houses, where you are able to fix the house and make a quick profit.
If you are interested in property investment but have no money, there are still ways to get the capital you need to get started. The information discussed on this page should give you an idea of a hard money loan and whether this is something that may be beneficial and suitable for you to use.