Traditional loans can be tricky to secure, especially when the intent is to purchase an investment property. Lenders often fear a building’s condition, which could be less than optimal and subsequently produce losses. For many, the best alternative is securing a hard money loan. This style of financing, however, requires careful consideration. Hard money loans have positives and negatives that make them different from other funding tools. Here are some factors worthy of consideration.

Benefits of Hard Money

Getting a hard money loan requires working with a small group or even one person. As such, there is little red tape. Those who offer hard money care nothing about an applicant’s debt or credit history. What they’re interested in is the property that the loan’s backing. As long as lenders find the building a worthwhile investment, they’ll be eager to do business.

These lending agreements also tend to be speedy. You could have your money in as little as a few weeks. With some lenders, the cash will be available within a couple of days. Getting a traditional mortgage can take up to three months; also, you’ll be required to buy mortgage insurance, which can be expensive.

Securing a hard money loan is one way of building a valuable fiscal relationship. As long as you pay what you owe on time and do not violate the terms of the agreement, there’s a good possibility the lender will feel comfortable working with you again. Depending on past performance, the lender might start offering certain advantages. Examples include waiving origination fees and providing more substantial credit.

Risks of Hard Money

Despite the above, hard money loans come with disadvantages. One is that their interest rates are higher compared with traditional loans. Lending agencies get away with these less-agreeable rates because their clientele usually has few options. They are also assuming significant risk. Therefore, they want to get paid back as fast as possible. The expectation is often that the total amount gets reimbursed within a few years or even several months.

With hard money loans, the physical property being purchased guarantees against losses. Therefore, an inability to pay would mean losing ownership of the building. Such an event could result in financial devastation.

Hard money loans can be an appealing option for real estate investors. That said, some qualities cut down their desirability. Weigh the positives against the negatives before taking advantage of one of these agreements.