If you’re looking into investment opportunities for your family, property might have caught your eye. Buying properties to renovate and sell on or rent out to a tenant is often considered a lower-risk alternative to venturing into the stock market, although you’ll typically need to have more money upfront. 

That said, you’re not expected to be able to pay for properties outright with cash (although that is, of course, the quickest and easiest option). If you don’t have a few hundred thousand to drop on an investment property, there are a few different financing options to look into. One of the most popular funding methods for real estate investors is hard money lending. 

If you’re keen to learn more about how hard money loans work and their feasibility for your project, keep reading. This guide covers everything you should know about how to use hard money financing effectively in your investment strategy.

What Is a Hard Money Loan?

A hard money loan is a type of short-term funding that’s provided by a private lender. The big difference between hard money lenders and banks is that these lenders base their decisions mostly on the potential value of the property. That means your creditworthiness is less of an important factor, and the lender will be more interested in seeing that you have a spid plan and exit strategy in place. 

Most real estate investors use hard money loans for projects that need quick funding but can be completed quickly, like house flips and construction work. They’re also a good option if you’re planning to buy a property that won’t qualify for a conventional mortgage. 

The Pros and Cons of Hard Money Loans

It’s smart to understand the pros and cons of hard money loans when you’re deciding whether or not they’re for you. 

The biggest benefit of these loans is how quickly you can get your hands on one. Your application will typically get approved within a matter of days, so if you’re after a hot property or buying at auction, you can move as quickly as is needed.  

But there’s a trade-off in the form of higher interest rates and shorter terms. Most hard money loans need to be repaid within 6 and 24 months. You’ll also need a clear plan to repay the loan (such as through selling the property or refinancing to a traditional loan), or the lender might turn you down.

What You’ll Need

While hard money lenders don’t focus overly on your credit score, most will still want to see that you’ve managed your finances responsibly. They’ll want details on the property, like how much you bought it for, how much you’re expecting to spend on repairs and renovations, and the projected resale or rental value.

Along with this, you’ll need to provide an exit strategy to your lender that outlines how long you’ll need the loan and how you plan to repay it. Without this, your lender might not have enough confidence in your ability to repay the loan to approve it. 

Are Hard Money Loans Worth It?

With all this in mind, you might be wondering whether hard money loans are worth it for your project. 

If you’ve done the numbers and the deal still seems good after factoring in loan costs, then you’re all good to go. That said, many people who use these loans are seasoned real estate investors, so you may want to work with an experienced friend or advisor if this is your first property venture.