When you want to invest in property or raw land, you will usually approach a bank or credit lending institution for funding. However, many investors might find a third option, the private investor to be more viable. This is because there are several differences between traditional loans and hard money loans, offered by private investors. Some of these differences may work to your advantage.
When you approach a bank for a loan, you need to offer some type of security. With a hard money loan, the property is the security. So, this makes it easy for you to get a hard money loan when you are not sure about the security. That said, not every property will qualify for a hard money loan. Lenders will look long and hard at the property value for resale before they give you a loan. It is very important to have the right property on your radar before you approach a hard money lender.
Hard money loans typically have higher interest rates, which can be considered a drawback. If you feel that the interest rates are too high and you might fall behind on your payments, it is a better option to ask a bank for a loan. That said, seasoned investors who can manage the investment process well, from purchasing to renovation or construction, and rental or sale, can usually repay the somewhat higher interest and the principal and still generate good revenue on the property.
Banks will not want to touch a loan proposal where the borrower has poor credit ratings. This can make it difficult for you to start to rebuild your credit record, and also deprive you of the chance to build wealth or generate an income. However, you can still approach a hard money lender. A hard money lender will have some interest in your credit record. However, despite a poor credit record, you can still approach a hard money lender, because they will primarily consider the value of your property.
You need to repay your loan within 6 to 20 months. Mortgages on the other hand, can be repaid over 20-30 years. This could be less of a burden to those who go with traditional loans, but the shorter duration’s would work well if you are planning to flip property or rent it to generate revenues as soon as possible.
To make things easier for you, the lender may need small monthly payments from you, and let you repay the rest of the loan once your property earns revenues or you sell it. This is different from a traditional loan, where you need to pay the interest as well as part of the principal, to clear the loan over the long term. This is what makes the hard money loan such a good idea, for property investors.
There is always the option of exchanging your loan for a traditional loan, once your credit ratings have improved or you change your plan of action. Thus, a hard money loan offers flexibility and easy funding, where you might be able to start earning wealth within a few months.