There are different forms of money lending that you may know or may not know. If you want to make a living with it, then you will be better off if you know all of it and the most lucrative ones as well. Right at the outset you must know that money lending business is a form of making investment. You put in your money on other people, known as borrowers and earn profit on the amount that you lent out, which is termed as interest.
- As compared to all types of investments, typically investing in real estate is considered to be the most lucrative way to make money as well as build wealth.
- For an investor such as the money lenders this is also the most effective, productive and reasonable way to diversify their portfolio.
There are lots of different ways in which you can make an investment on real estate such as real estate crowd-funding and Real Estate Investment Trusts or REITs. These sources will allow you to invest your fund more passively though there are a few specific investors who prefer investing directly to own a property.
Similar to them, you too may not be confident and comfortable in parting away with and investing such a huge amount of cash up front to purchase a property or invest in real estate. In such a situation, hard money lending may prove to be the best possible answer.
However, remember, as it is in all other cases this type of money lending too has its signature advantages which are considered to be far better than traditional financing but it also has its significant and potential downsides.
Working of hard money loan
Michele Tecchia says, in order to make sure that hard money lending works for you well and just as you desire, you will first need to know what it is and how hard money loans work. As far as the features of hard money loans are considered, these can be summarized as:
- These loans are sometimes denoted as bridge loans
- These loans are offered by private lenders and not conventional financial institutions such as banks
- These are typically short term lending instruments and
- The funds help the users to develop or renovate a property in order to sell it off for a profit later.
These loans are typically used by the real estate investors for financing their investment project and are considered to a very useful tool for the real estate developers as well as the house brokers.
These loans are considered to be different from traditional bank loans because the eligibility of any borrower to get a hard money loan is typically not based on the credit score. On the contrary, it is the value of the property itself that the hard money lenders consider to determine whether or not they will make the loan.
- While considering the value of the property in question, the hard money lenders specifically focus on the After Repair Value or ARV.
- This is ideally an estimate of what the value or sale price of the property will be once the development and renovation phase is completed.
Therefore, the first step towards making your hard money lending business successful is to know how you should evaluate a real estate investment property.
The pros and cons
What is the secret of success for banks, other financial organizations, credit unions and different other online money lenders such as Libertylending.com when it comes to money lending? Well, it is their power to evaluate a borrower as well as considering the pros and cons of each loan account. Therefore, to become one like them you will need to understand the pros and cons of hard money lending.
As far as the pros of hard money lending against a conventional mortgage from a traditional bank are concerned these are:
• Convenience: It is very convenient to apply. It does not much time as a traditional mortgage will take which is primarily due to the regulations imposed on mortgage loans by the Dodd-Frank Act. This time for mortgages, which can be even months, to close may put an investor at a considerable risk of losing out on a specific investment property. However, with hard money loans matters can be settled in weeks. This is especially helpful for funding a large scale development project which an investor cannot afford to deviate from its specific timeline to complete.
• Terms: The terms of hard money loans are usually much more flexible than traditional mortgages. This is because these loans are issued by private lenders who are more open for negotiating on the terms of the loan as opposed to the conventional banks. Chances are high that you will get an opportunity to make the repayment schedule tailored to meet the needs of the borrowers as well as yours to get assured fees.