Getting started in real estate investing can be difficult for someone who has never been an entrepreneur before, or doesn't have their own capital to begin their investing career. Many are left wondering what the best way to get started is. A quick google search will send them down the path of private lenders, but that answer just poses another question; is using hard money for a real estate investment a good idea?
The honest answer is… it depends.
Hard money is a real estate financing tool used by experienced and novice investors alike. It is a way to get into deals quickly without having to put your own capital into the acquisition. For strategies that rely on quick execution and opportunism, a good relationship with a hard money lender can be a significant asset for your business. Examples of such strategies include fix and flips and the BRRRR Method, where the primary goal is to get out of the initial financing quickly. This happens either through the sale of the property or through a refinance with a more traditional financial institution. In those scenarios, hard money is a great resource.
When are Hard Money Loans a Bad Idea?
Avoid Hard Money for Personal Uses
There are also instances where the use of hard money simply doesn't make sense. The most glaring misuse of hard money is for private, or non-investment uses. We strictly lend to business entities that are non-owner-occupied. Hard money should not be used for your personal residence and should be avoided at all costs. If you find a lender who is willing to provide a loan for that use, they likely do not have your best interest in mind.
Don't Use Hard Money for Complex Projects
Beyond personal uses, there is a wide range of legitimate investment strategies that also aren't a great fit for hard money. These include projects that have longer execution timelines such as new construction or extensive, unconventional flips. Projects like these can be difficult to complete quickly under the best of circumstances. Factor in the state of the global supply chain and inconsistencies in contractor labor, and it becomes increasingly unlikely that you will complete the project in time. At The Hard Money Co., our loan term is 6 months with an option to extend. We find that most of our borrowers can complete their projects within this period. When the projects are complex, though, we can see borrowers run into problems.
Consider All of Your Financing Options Alongside Hard Money
Finally, it's important to remember that hard money is just one of many financing options that exist. This is true for both veterans and beginners alike. No matter where you are in your investment journey, it's prudent to explore all of the options you have at your disposal. These might include loan products from a more traditional institution or through other instruments such as a home equity line of credit (HELOC). You might also consider soliciting investment funds from friends or family. If your investment strategy has real potential, you should be able to communicate as much in exchange for a fixed rate of return and/or an ownership share in the deal.
Using your own funds is also an option for those in a position to do so. Especially for short-term projects personal funds can streamline the efficiency of a deal and give you a head start on the project as a whole.
Of course, we recognize that these aren't realistic options for all investors, but part of maximizing your investment is understanding the opportunities that may be available to you. Comparing the terms of different financing options against your specific deal is essential in choosing the right path forward.
Is The Hard Money Co. Right for Me?
Regardless of whether or not you need a hard money loan today, establishing a relationship with The Hard Money Co. is an important step in starting your investment journey. We will have an honest conversation with each potential borrower to review their strategy and honestly determine whether our loan products make sense.
If you have any questions about whether hard money is a good fit for your investment, please don't hesitate to reach out. Filling out an application will be the fastest way to get the ball rolling, but you can start a conversation however works best for you. Our email inbox is always open, as is our phone/texting system.
We want to establish an ongoing partnership with you, the investor, and that starts with an introduction.
