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Sep 11 2018
What is a hard money loan?

Real estate investing remains one of the most proven and reliable ways for average Americans to build lasting wealth. While the majority of America’s household wealth is attached to primary residences, income-producing real estate offers even better prospects of acquiring real financial independence. The problem for most people, however, is that they simply don’t have the funds required to embark on their real estate investing careers.

One of the paradoxes of real estate wealth creation is that it tends to work in favor of those who already own real estate and against those who don’t. This can make it doubly difficult for those who own no real estate at all to get into the real estate investing game. In many real estate markets throughout the country, even entry-level homes are currently selling in the $300,000-plus range. This means that with a typical 25 percent down payment on a mortgage, assuming that an aspiring investor can even qualify for a traditional mortgage, they will need $75,000 or more just to make the down payment. Unfortunately, very few working-class Americans have that kind of cash just laying around.

While real estate investing is perhaps the single way to build wealth for those without deep expertise in financial markets and other investment opportunities, the incredibly high startup costs create a serious barrier to entry. How is the average person supposed to get their foot in the door when the initial capital requirements to do so in many real estate markets are often in the six-figure amounts? Hard money lending is one potential answer.

Hard money lenders can make deals happen

Many people new to the world of real estate rightly look skeptically on any claim that money can be made with zero money down or minimal cash outlays on the part of the investor. Yet, every day, the biggest real estate development companies and investment firms take on projects where their own capital outlays are miniscule in proportion to the total cost of the projects on which they are working.

Professional real estate development firms have access to sophisticated means of financing, including bridge loans, limited equity partnerships and even stock options and convertible debt structures. These investment vehicles provide the grease that keeps the wheels of the nation’s real estate economy turning. Yet many people are unaware that some of those same methods of financing are available to much smaller players.

Hard money lenders are one such alternative financing source for average people looking to develop real estate projects. Hard money lenders are not banks. Instead, they are local individuals or groups of investors that lend money on a typically short-term basis to provide bridge financing for real estate investors, house flippers and other value-adding entrepreneurs to get their projects off the ground.

Hard money lenders typically charge higher rates, a five percent flat fee and a 15 to 20 percent annual interest rate are common. But they can also allow investors to complete the purchase of properties with little to no money down. And unlike banks, hard money lenders are often able to get the investors cash in hand within as little as a single day.

Hard money loans can even provide cash for completing necessary repairs on a rehab property. All told, if you’re looking to get into real estate but your main barrier to doing so is starting capital, getting to know your local hard money lenders is the move you can make.

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