Hard money lending is the process through which real estate holdings are secured by, essentially, private money.  The people involved in hard money lending are not banks or your typical finance companies.  The people doing hard money lending are generally private individuals with a lot of funds on hand.  Hard money lending is not much more difficult to acquire than soft money, but it is subject to much more restrictive terms.

The typical terms of hard money lending is a maximum of 70% of After Repaired Value of the property.  ARV is the value of the property after repairs are made.  So, let’s say that you want to buy a house that is worth $50,000 in its current condition and will be worth $100,000 after you spend $20,000 to fix it up.  Let’s also say that your hard moneylender is willing to go 70% of ARV.  That means that you could secure $70,000 for the property through hard money lending.  That would be just enough to purchase your property and repair it.

Some other terms of hard money lending are typical interest rates of 12% to 20% based upon your experience in real estate and your credit history.  Hard moneylenders often want first lien position on the property as well.  In most cases there are points assessed just to use hard money.  Points represent 1% of the overall amount you are borrowing.  In order to decrease very high interest rates, you may have to buy points at closing.

One reason to use hard money lending is to make a deal happen faster.  Since you are dealing with a private investor instead of a bank or finance company when doing hard money lending, you can often get your hands on the money much faster than in a typical mortgage situation.

You will have to provide some proof of income and decent credit in most hard money lending deals, but some investors are willing to take a chance if they believe that you have found a particularly profitable piece of real estate to invest in.  This why hard money lending requirements and restrictions can vary widely.  You are dealing with a private individual and are subject to how that particular individual likes to proceed with his or her lending business.

Borrowing hard money can be an expensive undertaking, but if you make the right real estate deal, it can turn out to be beneficial for you and the lender.  Let’s look at the numbers on that $50,000 property we discussed earlier.  Let’s say that investing $20,000 in that property brought the ARV up to $120,000 instead of $100,000 and you only took the original $70,000 of hard money to buy and repair the property.  That could leave you with $50,000 upon selling as opposed to $30,000.  You would still make plenty, even after hard money lending interest and points.

The other advantage to hard money lending is that if you work with a private investor and all goes well on one deal, there is a good chance that they will decide to finance you on the next one, and so on.