When is it beneficial to use hard money to buy residential properties?

Let’s say there’s a killer real estate deal: a foreclosure just pops on the market for 50-percent below market value. The bank holding the title has too many bank-owned properties, it’s the end of their fiscal year and inventory is on clearance. The home only requires around $10,000 in aesthetic fixes, which leaves substantial room for resale profit. A visit to the local lender finds that government regulations have substantially limited investor-type “flip” loans and the required amount of documentation is overwhelming, especially for the self-employed investor.

This is where a hard money lender comes into play. A hard money lender allows a real estate investor to jump on an investment opportunity as soon as it hits the market, allowing for a fast close – often times under 10 business days – when compared to bank’s traditional 30- to 60-day financing. Hard money lenders also look at the individual investment, instead of heavily focusing on the borrower’s financial abilities. They often require loans be backed up with real assets, something that traditional banks often cannot accommodate.

Hard money loans allow investors to have quick access to money, allowing real estate “flippers” to quickly apply for a bridge loan, which offers affordable interim financing until the property can be repaired and put back on the market. Contrary to what some people may think about real estate investors, they are a vital part of the real estate market, helping fix homes and providing affordable housing opportunities to first-time buyers, individuals and families.

Hard money loans require far less red tape with virtually no bureaucratic ties. As these private loans are financed with investor funds, there are no government-regulated entities, such as Freddie Mac and Fannie Mae that require approval.

The advantage of hard money lenders is that loans are based on personal credit score, loan processing teams are avoided, government red tape is not applicable and these types of loans are ideal for short-term investment opportunities. Additionally, funding is rapidly available and most properties can easily be funded, provided they pencil with a black cash flow and not money-losing red. Additionally, each property is reviewed based on a beneficial analysis, being looked at by a loan committee with extensive investment experience, instead of government-ordered underwriters.

Hard money loans are ideal for residential rehabs, short-term flips and initial purchase investments. They also allow borrowers to borrow a higher loan-to-value (LTV) ratio or even loans based on after-repair-value (ARV). This helps borrowers have quick access to money for repairs and fixes to increase the property’s value.