Property investors of all types frequently rely on financing to expand their portfolios. From the commercial developer to the residential house flipper, making money in property requires spending money first. One option for getting the money you need is hard money lending. But are hard money loans good or bad for property investors?
Actually, the answer is ‘neither’. Hard money loans are a financial tool just like any form of business financing. They are neither good nor bad in and of themselves. What makes a particular loan good or bad is how it is used, by whom it is used, and from where it comes.
In any particular case, hard money really has to be assessed on its own merits. To that end, it is helpful to look at some key differences between hard money and standard business loans. If a property investor isn’t going to seek out hard money, he is going to have to get his funding from more conventional sources.
Approval and Funding Speed
One of the primary differences between banks and hard money lenders is speed. For example, apply for a bridge loan from Salt Lake City’s Actium Partners and you could expect an approval decision within a day or two, max. If approved, the loan could be funded in as little as 24 hours. You will not get that kind of speed from a bank.
Banks are not built for speed. In fact, it can take anywhere from 30 to 45 days to approve and fund a business loan. If you are investing in property, you might not have that kind of time. Property deals tend to move a lot more quickly than banks can accommodate, forcing investors to find sources of fast cash.
Demonstrating Repayment Capacity
Another key difference between banks and hard money lenders is how they look at the capacity of the borrower to repay. Most hard money lenders place a heavy emphasis on collateral. So, while a borrower still has to demonstrate capacity, his collateral plays a more important role in determining approval. Lenders are less likely to be concerned about short-term capacity if the value of the collateral being offered is high enough.
On the other hand, banks leave no stone unturned in determining a borrower’s capacity to repay. They look at everything from personal income to business history and debt ratios. This is one of the reasons it takes banks so long to approve business loans. They look at every financial detail under a proverbial microscope.
The Role Credit History Plays
Along the same lines, banks and hard money lenders look at a borrower’s credit history through different lenses. Banks use credit history and score as a measurement of how likely a borrower is to default. A bad history and low score certainly reduces the chances of being approved. And even when approval is given, they generally result in higher interest rates and less favorable terms.
Hard money lenders look at a borrower’s credit history as well. However, credit history and rating rarely determine whether or not a loan is approved. Loan approval is based mainly on the strength of the collateral being offered. In terms of credit history, hard money lenders use it to determine LTV and rates and terms.
A property investor has to balance what he needs against the pros and cons of both types of lending. If speed is the primary concern, hard money lending tends to win the day. Property investors might also choose hard money because it tends to be easier to obtain – even with less than stellar credit.