Many investors still harbor misconceptions about hard money lending, despite its growing popularity as a funding option for commercial real estate projects.
Don’t let the term “hard money” intimidate you — this type of loan can provide the fast, flexible funding you need to take your CRE ventures to the next level.
If you’re considering a commercial property investment, you must read this blog.
Let’s discuss the myths surrounding hard money loans and spotlight how these financing solutions can help you achieve your financial goals.
Myth 1: Hard money loans are hard to get.
One of the most common misconceptions about hard money is that it’s challenging to obtain. This is mainly because of the word ‘hard.’
However, ‘hard’ refers to the fact that the loan is secured using ‘real’ or ‘hard’ assets, resulting in ‘hard’ cash.
Many other names know these loans. They’re also called ‘private capital loans’ because they are financed by a small group of investors or private individuals instead of a traditional bank lender or institution.
Some people use the term ‘hard loans’ interchangeably with ‘bridge loans’ because they are relatively short-term (between 1 and 3 years) and both types of loans are designed to provide temporary financing for projects that may not qualify for traditional bank loans.
But there’s a difference: hard money is primarily secured by commercial real estate and is usually used to buy or rehab properties.
In contrast, bridge financing is often used to bridge the gap between selling one commercial property and purchasing another.
Myth 2: Hard money loan lending should only be considered as the last resort.
Since it’s an unconventional lending structure, some people perceive hard money as a desperate attempt to get financing — a last-ditch resort for investors with few assets or low credit.
This is way off the mark. Hard money loan lending is the most sensible and financially prudent option.
With faster closing times and a wider range of loan types and terms, these loans are strategic tools that CRE professionals can use to intervene in time-sensitive deals.
This is why an increasing number of savvy investors, lenders, and brokers recognize the untapped potential of hard money funding to support their projects.
Myth 3: It’s too risky.
As with every loan, hard money lending has risks. But it’s not a “trap,” nor is it riskier than conventional consumer loans.
Technically, taking out any loan is similar to making a promise. While you can attempt to keep that promise, you can never tell what will happen.
As long as an investor follows the loan terms and has enough income for payments, the extra risk can be avoided.
Hard money lenders take enough time to evaluate the property and project to ensure its success, minimizing the risk of default.
Myth 4: Hard money loans come from loan sharks.
The misconception that hard money lenders are predatory extortionists prevents some commercial real estate investors from seeing the truth: this loan comes from experienced financial professionals who understand the CRE market.
Many hard money lenders are established business owners with proven backgrounds in commercial real estate development, investment banking, law, and accounting. They are well-respected lenders that are as legitimate as traditional banks.
That said, it’s important to be prudent and verify the hard money lender’s background and the terms of the loan before you sign anything.
Consider working with a direct hard money lender that offers creative financing solutions and flexible terms based on the characteristics of your CRE project.
To separate legitimate hard money lenders from those who may prioritize profits over your best interests, carefully review their references and credentials.
Reputable hard money lenders always adhere to federal and state regulations, including providing full financial disclosures.
Aim to work with an established private hard money lender that focuses on the value of your property instead of your credit history. This means they’re invested in your success and want to see your commercial real estate project thrive.
Because they rely on referrals and repeat business, they’re more likely to work collaboratively with you to structure loan terms that benefit both parties.
Myth 5: Hard money is more expensive than traditional loans.
Although private loans have higher interest rates, the costs are offset by speedy approval and closing.
Plus, if the property needs an upgrade or renovation, there is a chance to secure higher loan amounts based on the projected or improved property values instead of the current market value.
Borrowers who are interested in hard money should carefully compare the overall costs against the potential delays and uncertainties associated with traditional bank financing.
The higher interest rates reflect the increased risk that private lenders assume. Moreover, other closing costs may be comparable or even lower than what conventional lenders charge.
Myth 6: Hard money loans have more stringent and harsh terms.
In reality, private direct money lenders are more willing to negotiate terms with borrowers because they are not limited by the regulations affecting banks and conventional institutional lenders.
Because they are not obliged to follow loan committees, borrowers can negotiate terms more freely. Some can even acquire enough additional funding to cover the interest payments for the loan’s term.
Remember: Hard money lenders are invested in the success of the borrower’s project. To ensure a profitable return for their investors, they’re often more flexible in structuring loan terms to meet the specific needs of each project.
Open and honest communication is essential to a successful hard money loan deal. Stay in touch with your lender throughout the loan term to proactively identify potential challenges and work together to find solutions.
For example, if your original exit strategy doesn’t pan out, many lenders are open to extending the loan term to give you more time to develop a new plan.
Myth 7: Hard money loans cannot be combined with soft money loans.
Seasoned CRE investors routinely combine hard and soft money loans to navigate various real estate scenarios.
Hard money loans provide the necessary funds to pay off soft money loans that may have become too burdensome. They can also be used to refinance a property with a partially paid-down soft money loan (allowing you to access equity).
Soft money loans can be used as an exit strategy for hard money loans if you need funds to refinance a property or complete a construction project.
Understanding the interplay between hard and soft money will let you optimize your investment strategy.
Myth 8: Getting a hard money loan involves a bureaucratic and slow process.
Unlike traditional banks, hard money lenders can review and process your application quickly. Some can even approve applications within 24 to 48 hours.
Myth 9: Hard money lenders will only take your property.
No — that is the last thing they want to do. Reputable hard money lenders are professional entrepreneurs in the lending industry, not foreclosure specialists. They do not want to seize and claim your property.
However, it’s up to you to prevent foreclosure by understanding your loan terms and having a solid exit strategy for your investment project. More importantly, you should repay your debt on time.
Discover the best hard money loans for commercial real estate
At Private Capital Investors, we understand that many investors often need to learn about hard money loans. This is why we work closely with them throughout the process to find the right solution.
Together, we debunk the myths around hard money loan lending by streamlining the process for every client.
We have a track record of financing commercial properties from $1 to $50 million, closing in as fast as 2 weeks, and approving loans in 24 to 48 hours.
As a full-service commercial direct lender, we have established correspondent relationships with dependable names like Pension Funds, CMBS, and Life Companies. These partnerships allow us to provide permanent financing and ensure you get your funding quickly.
Being commercial real estate hard money lenders, we require minimal documentation to speed up your application process.
We can help you get the best hard money loan lending solutions to fund a wide range of properties, including multifamily and office buildings.
We have also helped our clients acquire the necessary financing for other eligible commercial properties, such as:
- Retail
- Luxury Residential
- Light industrial buildings
- Hospitality
- Development
- Urban land
- Self-storage
Our hard money loan solutions have also supported clients who required funding for the following transactions:
- Note purchases
- Purchase loans
- Pre-construction
- Add value
- Tenant improvements
- Repositioning
- Debt consolidation
- Partner buy-outs
- Taxes
If your bank refuses your project or if you have less-than-stellar credit, you can trust us to have the hard money financing solution to meet your needs.
Private Capital Investors can help you secure rates as low as 7.5% nationwide and ensure the funding is ready in as little as 14 days. Plus, you can count on our experts to support you throughout.
Request a loan today or learn more about our hard money solutions by calling 972-865-6206. You may also email info@privatecapitalinvestors.com.
