If you’re looking to finance a property venture, you’ve probably considered hard money lending. But just because a lot of investors use this option, it doesn’t mean it’s right for you.
To help you determine whether hard money financing is a good fit for your project, we’ve outlined everything you should consider here.
Understand What Hard Money Financing Is
Hard money financing is a quick, short-term loan that’s typically used for buying real estate. Your first step towards knowing whether hard money financing is right for you is understanding what it is and how it works.
Make sure to do your research and learn all about hard money loans, including how they work, their pros and cons, and which scenarios they’re best for.
Consider Your Timeline and Urgency
The big benefit of hard money loans is that they’re approved quickly, usually within a day, so you can use them for any project that requires you to move fast (like buying a property at auction, for example).
But if your project doesn’t have strict time demands, you might want to compare other financing options first. Keep in mind that the speed and flexibility of a hard money loan come at a price, and for projects where you want to take your time, you’re likely to find better loan terms with another method of funding.
Review Your Credit and Financial History
Hard money lenders provide asset-based loans, meaning they’re based on the value of the property rather than your own creditworthiness as the borrower. That means your credit and financial history are less important.
That said, lenders will still look at your financial background when they’re considering the level of risk involved in approving your loan. You’ll probably be viewed as too high-risk for this financing option if you’ve had multiple defaults or bankruptcies.
Check If You Have a Clear Exit Strategy
Having a poor exit strategy is a bad idea regardless of the type of financing you’re looking at, but especially so with hard money, since these loans are usually short-term. You want to make sure you have a clear plan to pay off the loan, whether that’s by selling the property or refinancing, before you commit.
If you don’t have a solid exit strategy, you’ll need to think carefully about whether hard money loans are the right choice for you.
Think About the Type of Project You’re Funding
Hard money financing is particularly good for projects where you need to move fast to close the deal and make big profits. Lots of investors use them for fix-and-flips and auction buys, as they’re able to get their hands on the financing they need to buy an attractive property and renovate it to resell or rent within a matter of months.
On the other end, hard money typically isn’t suitable in any project where you can’t (or don’t want to) pay off the loan quickly, and you can’t usually use this lending option for buying a primary residence.
