Since 2008, conversations and questions about the pros and cons of hard money loans have taken over the real estate investment world. Some private investors are still confused about the nature of these loans, while others have jumped on the bandwagon and partner with hard money lenders to fund every project.
The truth is hard money loans are relatively simple investment tools with quite a few benefits that often go overlooked. Here are the facts:
- Equity Based Loan
- Loan terms based on collateral
- Not based on borrower credit score or borrowing history
- Short-term Bridge Loan
- Typical hard money loan terms range from 5 to 12 months
- Close Deals Quickly
- Use cash to close deals quickly
Intrust Funding is a hard money lender operating in Western Washington since 2008. With over 1,500 loans funded, we have proven ourselves as the leading hard money loan provider in Western Washington by having a less than 1% borrower default rate. Our key to success is that we do all our underwriting in-house, which means our underwriting principles are extremely accurate and effective.
Our philosophy is that hard money loans have value to the extent that they are used by real estate investors for short-term deals. Like other lenders, all properties purchased by a hard money loan must be non-owner occupied. Similarly, if the money will go towards property renovations that property must be non-owner occupied as well.
How Do Hard Money Loans Work?
Fix-and-flip investors are all the talk these days, and it’s due in no small part to the role hard money lending has played in real estate post-2008. One simple way to use a hard money loan is to fund a property purchase, then, if you have enough cash flow, pay for renovation out of pocket, or if you don’t, you can roll-up renovation cost in the loan. You make all your money back by selling the property at the end, or holding it to rent out, because the After Repair Value (ARV) of the property will be larger than the original purchase price.
How much money hard money lenders will give an investor in any given loan depends on the Loan to Value (LTV), which is a ratio of the loan amount to the expected After Repair Value (ARV) of the property. Many hard money lenders will loan about 65% LTV. That means if you are taking out a loan on a 1,000,000 property, a typical lender will lend up to $650,000 for that deal.
Example: Using Hard Money Loans for Real Estate Investments
So let’s say you find a property on the market for $100,000. It’s in a good area but really needs renovation work, maybe some foundation fixes. You expect it’ll cost about $100,000 to fund the rehab. Because it’s in such a good area, there are a lot of investors looking to purchase the property. You get in contact with a hard money lender like Intrust Funding to get leverage on a deal: with Intrust Funding, you close on the property within 48 hours. And because Intrust Funding has an in-house underwriter, and determines that your new investment will likely go for $300,000 in the current market, on a 65% LTV, they loan you up to $260,000 to both buy the property and to conduct renovations. Since you only need $200,000, you don’t need the full $260,000, which leaves about a $100,000 margin for selling your property and turning a quick profit!
A Secured Investment
At Intrust Funding, we like to think of our borrowers as partners. As we see a lot of new investors making deals, we focus on borrower education, which means we only take deals we think are good for investors. As a hard money loan provider founded by real estate experts from Western Washington, we know this market well. And we won’t go in on a deal with you unless we think it is a good deal that will help you be successful in the future.