When hard money and private money won’t work for you

hard money private money

Hard money and private money loans are often the ideal choices for flippers and property developers who need finance fast.

They are tailored specifically toward property developers who need funds to purchase and redevelop properties over short time periods.

They are popular because of their:

Speed – loans are often approved in as little as 48 hours

Flexibility – loans are customizable and have fewer conditions than traditional loans 

Solution-oriented nature – offering capital to customers that traditional lenders reject

But for some people, hard money and private money loans are the wrong rein to pull.

Despite their significant benefits, hard money and private money loans come with higher interest rates than traditional loans.

They may also require a higher downpayment and typically require repayment over much shorter time frames, only rarely going beyond 18 months.

These are the customers or circumstances where hard money and private money loans are the wrong option.

Long-term investors

Mitch and Bella have always wanted to buy an investment property.

But they are struggling to find a bank that will approve their loan to buy a $600,000 condo in Highland Park.

They consider approaching a hard money lender.

But this would be a big mistake.

For investors looking to hold a rental property for a number of years, the higher interest rates commanded by a hard money loan would erode much of the profits.

Mitch and Bella need to seek a traditional 30-year mortgage or portfolio loan.

They must also find a way to increase their downpayment, earning capacity or improve their credit score to meet the conditions and be approved for it.

Borrowers without a clear exit strategy

Hard money and private money are designed as quick fixes.

They are short-term solutions that usually demand repayment within a 6-18 month time frame.

Borrowers need a clear cut strategy about closing the loan without fear of defaulting and risking the lender foreclosing.

That strategy is normally as simple as buying a property, renovating it and selling it for profit.

Refinancing to a traditional loan is another sensible exit strategy while renting or wholesaling the property are among some emergency options that may be actioned.

Borrowers without a clear exit strategy should not consider hard money or private loans.

Projects without high growth potential

Hard money and private money loans work best for projects which stand to return a handsome profit.

These include fix and flips, renovations and commercial developments.

That profit will then comfortably cover and justify the cost of the higher-interest loan.

Hence, if a project does not have a big financial upside, hard money and private money loans are a costly mistake.

For properties with limited prospects of appreciation or in a stagnant market, alternative sources of finance should be sought.

Individuals with low risk tolerance

Hard money can be relatively easy to gain.

But for individuals who may be inexperienced in the renovation game or who are not comfortable with the higher levels of risk involved, it can be a hard lesson learned.

That’s because hard money loans come with higher interest rates that demand higher monthly payments across much shorter terms.

The risk of losing the property as you renovate it against the clock can be extremely stressful.

It demands a high work ethic as well as exceptional planning, organizational skills and financial discipline.

Borrowers should carefully assess their financial position and ability to execute before choosing hard money financing.

First-time investors are advised to partner with experienced developers or mentors as they navigate hard money and private money finance for the first time.

Low-equity borrowers

Hard money and private money lenders are much more flexible than traditional lenders and deliver finance fast.

Borrowers don’t need a great credit score.

That’s because loan approval is based on the value of the property after the renovation.

Hard money and private money lenders will often lend up to 75% of a property’s ARV (After-Repair Value).

But low-equity borrowers generally pay a higher price for finance.

Cash-poor flippers are sometimes approved with a downpayment of as little as 10%.

But they should examine the terms and interest rates closely as they are likely to be much less favorable than those for a borrower with a downpayment as high as 30%.

Hard money and private money loans are not available to home buyers, investors or flippers seeking 100% financing.

Individuals who have access to traditional loans

Hard money and private money loans are almost always the option for developers and flippers who either don’t have access to traditional finance or need the flexibility that banks won’t offer.

But individuals who could be approved for a traditional loan and have the luxury of paying it off over a longer period should consider pursuing that option.

That includes first-home buyers who may be approved for an FHA loan with as little as a 3.5% downpayment.

While owner-occupied private loans are available in California, they normally require a downpayment of around 30% on terms as short as 12 months.

They are an expensive short-term solution.

Get advice today

Hard money and private money are reliable, highly accessible financing options for experienced flippers and developers with clear exit strategies.

But they are not suitable for all types of property transactions.

They are also not a recommended vehicle to service credit card debt, home improvement costs or as a bankruptcy buyout.

If you are in the property development business and keen to explore your options in the hard money space, a call to Equidy might be prudent.

Equidy has an intimate and personal history with property and has covered all aspects of real estate and property development in California for more than 40 years.

We work creatively with our clients every step of the way, providing a wealth of knowledge and support network as the clients’ projects take shape.

Equidy is a hard money lender with one of the most respected and enviable reputations on the west coast.

Contact Equidy today to book your free strategy call or apply now in a few minutes.

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