Real estate investment and development continues to be one of the most lucrative and rewarding careers in the United States. While many people are interested in getting into this exciting and challenging career, many do not have a good idea where to begin. Even the lowest-end real estate projects often require tens or hundreds of thousands of dollars in up-front costs. How is someone with little experience who may not even have great credit supposed to pony up the $200,000 needed to carry out a home rehab project or get into an income-producing producing property?
The truth is that almost no real estate projects are financed purely through the developer’s own capital. In fact, most professional real estate developers only take small equity positions in their projects thereby dramatically reducing their risk while ensuring gains through fees and other incentives. This leaves the question of how these real estate projects are funded.
Most major real estate developers have an intricately developed web of financing. This not only involves bankers who make traditional commercial loans, but it also includes wealthy individuals, investment funds and groups of individual investors. Some of these investors may be interested primarily in taking equity positions. Others may specialize in making high-yield loans. These highly flexible financing facilities are the lifeblood of major development projects. Without them, hardly a skyscraper, strip mall or apartment complex would ever be built.
But those looking to get into real estate investing or development for the first time almost never have access to anything resembling the sophisticated financing options that professional development firms enjoy. Most of the time, people who buy their first investment properties or house-flipping projects attempt to do so through a combination of their own out-of-pocket cash and traditional mortgages. However, this can severely limit the ability of the vast majority of people to get into real estate investing. After all, who has $50,000 cash just lying around, waiting to be used as a down payment on a mortgage?
This is where hard money lending comes into play. Hard money loans offer much of the flexibility that the big dogs in the real estate development game have at their disposal. A typical hard money loan might be used to complete the purchase of a home for a house flipper. The bank will typically require that 25 percent of the final sale price be made as a down payment by the mortgagee. In many real estate markets, this figure will represent a six-figure amount. Almost no one has that kind of money.
The solution is to go to a local hard money lender. Hard money lenders often have a sort of underworld mystique about them. They rarely ever advertise openly, and for a newcomer to the real estate development business, they may be completely invisible without knowing where to look. But hard money lenders can often be found by chatting up local real estate agents and developers. Once an investor has found a hard money lender and developed a relationship with them, their life often gets a whole lot easier when it comes to closing real estate deals.
Hard money loans can be issued almost instantly. They are rarely tied to credit, and almost anyone can qualify for them, provided the collateral on the deal is sufficient. Ultimately, hard money loans can make deals happen that would otherwise have fallen through. Although they often come with a 5 percent fee and 15 to 20 percent annual rates, the ability to quickly complete purchases in competitive markets means that hard money loans are a tool that every investor should have at their disposal.