What is a hard money loan?

If you haven’t had success with obtaining financing through traditional methods, a hard money loan may be the right choice for your South Florida real estate investment.

But what is a hard money loan?

Hard money lenders often work by financing your loans through private money, and so you will be dealing with your lender more intimately than you would with a bank. This can be great for investors looking for long-term financing relationships.

Because these lenders are private, you will typically find that approvals and deals are done much more quickly, which can be the difference between increasing cash flow and increasing holding costs.

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Most hard money deals will have short loan terms – typically 12-months – designed to help investors maximize the amount of cash they have on hand while still covering payments through rent or other income. This typically will come with higher interest rates, but many loans are structured as interest-only payments so you won’t need excess capital for them.

You will secure your loan with a fixed asset, the property that is being lent toward. This ensures lenders that they have suitable collateral, but can also increase their risk as if you default they may be left with a distressed property that they are now responsible for, hence justifying higher interest rates.

Your loan will be based on the valuation of your property – not the market rate – and most hard money lenders will only give loans around 65% to 70% LTV (loan to value) which gives greater security to lenders. However, one way to think about this is that by covering the rest of the value you are putting money into your project with your lender, creating a new partnership together. Your lender will respect your commitment to the project, and it is in his or her best interest to see you succeed.