Empowering Homeowners

What is a private loan (hard money loan)?

A private loan, commonly known as a hard money loan, is a short-term, asset-based loan primarily used in real estate investments. Unlike traditional bank loans, which rely heavily on a borrower’s credit score and income, hard money loans are secured by the value of the property being purchased or used as collateral. These loans are typically issued by private investors or lending companies rather than banks.

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Key Characteristics of Hard Money Loans

• Collateral-Based: Approval is based on the value of the real estate asset rather than the borrower’s financial history.

• Short-Term Financing: Usually ranges from 6 months to 3 years.

• Higher Interest Rates: Typically 8% to 15%, higher than conventional loans due to the increased risk for lenders.

• Faster Approval Process: Funds can be available in a few days to a few weeks, making them ideal for time-sensitive deals.

• Lower Loan-to-Value (LTV) Ratio: Lenders usually finance 60-75% of the property’s value, requiring investors to have some capital upfront.

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How to Use a Hard Money Loan in Real Estate

 

1. House Flipping

Investors use hard money loans to purchase distressed properties, renovate them quickly, and resell them at a profit. The short-term nature of the loan aligns with the fast turnaround required in house flipping.

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2. Rental Property Acquisition (BRRRR Strategy)

The BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) relies on hard money loans to purchase and renovate properties, after which investors refinance with a traditional mortgage and repay the hard money lender.

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3. Bridge Loans

Hard money loans are used as temporary financing for real estate investors who need quick capital while waiting for long-term financing approval.

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4. Commercial Real Estate Deals

Investors in multi-family properties, office spaces, or warehouses often use hard money loans to acquire or renovate commercial properties before securing long-term institutional financing.

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5. Land Acquisition & Development

Developers use hard money loans to purchase raw land or to finance initial development before getting traditional construction loans.

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Steps to Secure a Hard Money Loan

1. Find a Private Lender: Look for reputable private lending firms or individual investors specializing in hard money loans.

2. Assess Property Value: The lender will evaluate the After-Repair Value (ARV) of the property.

3. Agree on Loan Terms: Negotiate interest rates, loan duration, fees, and LTV ratio.

4. Provide Down Payment & Documentation: Expect to pay 25-40% down, along with basic documentation like property details, rehab plans, and an exit strategy.

5. Close the Deal & Receive Funds: The process is much faster than traditional mortgages, often closing within 1-2 weeks.

 

Hard Money Loans in Real Estate

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• Fast approval process

• Flexible lending criteria

• Ideal for time-sensitive or high-potential deals