Hard money loans are typically created when a professional rehabber wants to borrow money in order to purchase, rehab, and fix a house. The loan is secured by a deed of trust, which specifies that, in the event of a default, the lender has the right to foreclosure and can take control over the property.
As an investment, this type of opportunity provides cash flow and also favorable liquidity due to the short term of the loan.
- Unlike most real estate investments, hard money loans allow investors to receive their capital back in a shorter time horizon than that of other real estate investments. A typical short-term hard money loan will have a 6-12 month term. This means that the investor can expect immediate cash flow upon funding the transaction and an anticipated return of capital within a much shorter time period compared to other typical real estate investments.
- When you invest in hard money loans, you are in the position of the bank. There are several benefits to investing like this:
- Never deal with tenants, toilets, and trash.
- Never deal with property management.
- Receive predictable cash flow regardless of how the property is performing.
- The investor’s capital is secured by a hard asset, which is increasing in value due to the rehab. In a typical hard money loan, the borrower will add value to the collateral of the loan through rehabbing the property. In reasonably stable markets, this means that the loan becomes more secure as the collateral of the loan increases in resale value.
- In order to structure the loan for maximum protection, the borrower will put up his own capital so that he also has skin in the game. This aligns the incentives of the lender and the borrower so that only deals that will be mutually profitable should be pursued.
- Several months of payments are held in an escrow account, which will automatically be directly deposited to the lender’s bank account.
- The loan will be serviced by a professional servicing company that will handle all communication with the borrower, apply late fees when needed, and file all necessary formal documentation for the duration of the loan. This allows the investor to have peace of mind knowing that all administrative duties of the loan will be taken care of.
As an investor, playing the role of the bank can be extremely profitable as well as passive. Only on extremely rare occasions do hard money lenders actually take back properties through foreclosure. This means that hard money can provide a great way to get some of the benefits of real estate investing without the headaches of tenants, toilets, and trash.