Contrary to popular belief “hard money” loans are not called hard money loans because they are hard to get or because their expensive terms and conditions are hard on borrowers. The name comes from the fact that hard money loans are loans that are, by definition, backed by a hard asset such as a piece of real estate or another asset like a bulldozer or a piece of manufacturing equipment.
In the recent past hard money loans had a bad reputation but today the term hard money simply refers to private, non-institutional, asset based lending. In fact with, the onset of the worldwide credit crunch, private lending has become main-stream business and is, in-fact, the fastest growing part of commercial real estate finance.
Private lenders usually offer short term (12-36 month), high interest (9-15%), bridge loans against commercial real estate. Private lenders might be wealthy individuals, small firms organized to make loans or real estate divisions of hedge funds or private equity firms.
Qualifying for a private commercial mortgage loan is not difficult if certain requirements are met.
Low Loan-to-Value (LTV)
Most private lenders will not lend more than 65% of the value of an income producing building that can cover its own mortgage payment. Underperforming or vacant similarities should not expect LTVs over 60% and commercial land assets will not receive loan offers of more than 50% LTV.
Private lenders today will not partner with investors, character owners or developers who don not have a meaningful cash investment in the target character. The days of 90-100% financing by seller financing or large 2nd mortgages are long gone. I don’t care what they told you in that on-line, real estate riches, boot-camp, seminar; you can not get a hard money loan with none of your own money invested in the project.
Realistic Exit Plan
Private loans are short term loans. To obtain an approval and close a deal, it is imperative that borrowers have a viable, realistic plan to pay back the hard money on schedule. Private lenders are very aggressive in collection situations and usually need a personal identifying characteristics guarantee on every loan; you must have a workable exit strategy or you risk losing the character financed plus your personal bank account.
Private lenders tend to be successful business people who want to work with other successful specialized people. Today’s real estate ecosystem is much to challenging and much to risky for lenders to take chances on rookies and dreamers. It is very possible to get a private loan for the buy, development or refinance of a commercial character but you will need to demonstrate a track record of success.
Commercial character owners and investors who meet the lenders criteria will find that they have no problem securing a private, hard money, commercial mortgage loan.