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The Value of Hard Money in the Real Estate Investment Industry

Private (or hard money) lenders are some of the most important funding sources for real estate project investors. Whether you’re new to real estate investing or an expert, chances are you will want to scale your business at some point. And every successful real estate investor knows that, to scale your business, you need one thing: reliable funding.

With the current condition of the market, it’s now more important than ever to make sure that you have a relationship with a hard money lender that you can rely on. Here are a few benefits to using a private lender:

Men discussing the hard money

Hard money loans are approved and funded quickly

The approval speed of hard money loans is one of their biggest advantages. In many cases, lenders can approve your loan in one to two days. They will consider the attributes of the property, the down payment amount or equity you have in the property, your experience, your exit strategy, and they will make sure you have some cash reserves to make monthly payments.

In addition to the quick approval, hard money lenders can also fund projects quickly. If needed, projects can be funded or have draws completed within three to five days.  Compare that to the 20+ days it can take a bank to fund. In today’s real estate market, how quickly you can close on a project is often more important than the cost of capital. Most investors would rather pay slightly more to be assured they will close in a week rather than risk closing in 45 days.

This fast funding is also helpful when you’re trying to close on a project in a timely manner. For example, a deal that would benefit from a 1031 exchange.

Private loans provide funding for projects that cannot be financed elsewhere

Hard money lenders often provide funding that banks may not consider. An example of this would be a short-term loan for an investor that wants to purchase a property, quickly rehab it, then sell or rent the units. In most cases, you only need a 12-18-month loan, which most banks don’t offer. Banks prefer long-term loans and are happy to make their interest over a long period of time.

In addition, hard money loans are ideal for properties that have numerous issues that prevent them qualifying with a bank. These issues could be related to the foundation, electrical work or plumbing, for example. Banks are highly regulated, risk-averse lenders and are unable to consider loan scenarios that are outside their criteria.

A hard money lender would be able to fund a loan for a property that has these issues. They employ their own lending guidelines and some even have in-house underwriters, enabling them to adjust the loan conditions to meet your funding needs.

writing pros of private lending

Increased capital, bigger projects

Many hard money lenders will have a maximum loan amount as well as a maximum Loan-to-Cost (LTC) ratio, dictating the amount of financing you receive for your commercial real estate project. Hard money lenders that have a high LTC percentage can provide increased capital upfront, providing you with more flexibility and the option to fund the project on your own rather than bringing in a partner.

In addition, increased capital allows you to slowly build your way up to bigger projects. You can start looking at multifamily and commercial deals, rather than solely looking at single-family properties. Closing more deals will also increase your personal capital and give you higher returns on bigger deals.

A note on our lending environment

We understand there is uncertainty in the markets and recognize the seriousness of the current environment. Broadmark Realty Capital’s focus is primarily on short-term, real-estate-backed senior mortgage loans, and we currently have no debt on our balance sheet. Because we do not use leverage and are not dependent on outside lenders to fund our loans or construction draws, we expect to be able to effectively navigate the liquidity and funding challenges that some of our highly levered competitors are facing in this environment.

The world has changed considerably since we founded Broadmark ten years ago following the financial crisis, and the current global public health emergency is a stark reminder that developments in financial markets are impossible to predict. However, what has remained a constant over the past decade is our commitment to always functioning responsibly on behalf of our borrowers and our investors. We remain focused on continuing to serve as a reliable source of funding for our borrowers who have come to value our flexibility and the certainty of execution that we provide.

What is hard money lending?

Let’s break down hard money lending in detail.

We suppose the best way to introduce this topic is to start with the basics. What is a hard money lender and why do they matter? For starters, private lenders aren’t banks. A hard money lender is a non-institutional company (or individual) that loans money typically for the purpose of funding a real estate deal.

Why Hard Money?

The easiest way to break down the benefits and drawbacks of hard money lending is to compare private lending with banks. Let’s try and simply Pro / Con list.

Hard Money Lending Benefits

As we’ve covered before, speed is probably the largest advantage of private lending—funding can be secured extremely quickly and the qualification process is much less laborious and intricate. In most situations, these deals can be completed and funded within a week. Compare that to the 45-60 days it takes, on average, to secure a bank or credit union loan. The application process usually takes 1-2 days, and sometimes can be completed the very same day. Needless to say, speed is a huge advantage, especially if you’re trying to secure a property against other competing bids. A quick close with a private lender can entice sellers and set your offer apart from other buyers with slower, more conventional funding.

Some other benefits include:

  • No rigid lending requirements. The lender and the borrower can set their own terms according to their needs.
  • Much less emphasis is placed on income requirements and credit scores. More focus placed on the value of the deal rather than the history of the borrower.
  • No high prepayment penalty fees

Hard Money Lending Drawbacks

  • Loans typically are accompanied by a higher interest rate compared to traditional banks.
  • Most loans are short-term (banks can extend to over 20 years) and lenders expect to see a detailed exit strategy.
  • You must clearly show the property’s income potential—which can be challenging on a tight budget and timeframe.
  • A poor or mediocre loan-to-value ratio will put you in the position to cross-collateralize to reach your full amount requested.

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one our lending experts today.