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Investing in real estate is a great way to build long-term equity and earn some additional interim cash flow. When you are looking to purchase real estate, you may need to get financing to do so. One type of financing that you should consider getting is a hard money loan, from Delancey Street.
What is a Hard Money Loan?
A hard money loan is a type of loan that is secured by real estate. This type of loan differs from a traditional mortgage a few different ways. One of the main ways that it differs is that it is normally provided by an individual investor, finance company, or investment fund, as opposed to a traditional bank. Along with this, a hard money loan normally does not have the same requirements as an investment loan mortgage, which means you can normally get one with less money down and there are less regulatory requirements.
Benefits of a Hard Money Loan
There are a variety of benefits that come with hard money loans, as opposed to traditional investment real estate loans provided by banks. One of the main benefits of a hard money loan is that you normally will not have to put forth as much equity as you would with traditional investment real estate loans. While a bank may require that you put forth a down payment of 25% or more, a hard money lender could provide you with higher levels of financing. This frees up a lot of additional equity and can boost your IRR.
Another advantage of a hard money loan is that they do not have the same regulatory requirements as traditional bank loans. This means that you may not have to guarantee the loan or go through as many hurdles that come with getting a traditional loan. Because of this, hard money loans can normally be funded faster and lenders can be more flexible with terms, which could align better with your business plan. This can make them a great option depending on what you plan on doing with the real estate.
Drawbacks of Hard Money Loans
While there are clear advantages of taking out hard money loans, there are drawbacks as well. One of the main disadvantages is that they are more expensive. Since hard moneylenders do not have the same cost of funds, they will normally have to charge you a higher interest rate and more fees than a traditional bank. This can make them more expensive, especially when the loan balance is higher if you do not put forth as large of a down payment.
Another disadvantage of a hard money loan is that your terms will normally be much shorter. When you take out a traditional loan, you may be able to get a term that is as long as 30 years in length with a fixed interest rate. When you borrower from a hard money lender, you will normally have to repay the loan much quicker than you would with a traditional loan. In many cases, hard money loans are considered a form of bridge financing that will have terms of no more than 3-4 years.