What is a hard money lender? This is one of the more common questions that many new real estate investors ask and one that even some not-so-new real estate investors ask.
The concise and to-the-point answer to this question is that a hard money lender will make loans to people who, for whatever reason, can't get financing from a traditional lending institution, such as a commercial bank.
Unfortunately, this answer leaves far too much to the imagination without providing important details about these types of lenders, the types of borrowers who benefit from them, and the types of properties and projects these lenders loan against.
First, the term "hard money" became popular after the financial crisis of 2008. As a result of somehow being tied to that event (which is beyond my understanding), that label has a negative connotation that many people associate with borrowers with bad credit.
And while there are some borrowers with less than a stellar credit rating that these lenders service, they make up a relatively small percentage of borrowers served by these types of lenders.
It would be more accurate to label these lenders as either "non-traditional" or "non-bank" lenders because that's precisely what they are. These are lenders who are actually more flexible in the borrowers' risk level to whom they loan and regarding the types of projects they'll accept as security for a loan.
Who benefits from non-bank lenders?
In addition to providing loans to higher-risk borrowers, non-bank lenders make loans to business owners, like real estate investors, builders, and other entrepreneurs, who don't earn a weekly paycheck.
Non-bank lenders also make high-value loans (up to $10 million and more) for a variety of reasons, such as providing short-term money (12-24 months) to fix & flip entrepreneurs. Non-bank lenders also provide long-term (5-10 years) funding to purchase or refinance many types of commercial real estate, as well as for bridge loans, foreclosure bailouts, and many other reasons that traditional bank lenders simply won't fund.
Do non-bank lenders charge higher interest rates?
There's no definitive answer to this question.
That's because, in many cases, a non-bank lender will make loans on properties that traditional bank lenders will not. Consequently, there's no way to make a factual comparison.
Another factor to consider is that non-bank lenders will make loans to borrowers who cannot obtain financing from any other type of lender. So, again, there's no way to make a factual comparison.
And, when weighing the cost to borrow to make a profit vs. not being able to borrow and losing the ability to make a profit, perhaps the cost of borrowing at a premium rate is more attractive than losing that opportunity.
Want more information?
Are you having a problem finding a lender to finance your property?
If so, and you're interested in learning more about how you can benefit from obtaining financing from a non-bank lender, contact me and let's chat.
It won't cost you anything but a few minutes of your time, and it may make the difference between making a profitable investment... or not.