The Essence of the commercial real estate hard money loan (HML) is based on the fact that they are short term loans for real estate investors to purchase and or rehab investment property that has substantial real equity. Commercial Real Estate Investors can make lots of money investing in properties using a hard money loan. For traditional financing the value of the property is the lesser of the purchase price or the appraised value. This definition does not account for distressed property which may be sold below market value and thus has real equity when compared to similar properties. This definition works for traditional lending as the best definition of value. It is impossible to determine future value of property that may not be in good condition or may have other appraisal value issues that may stop the property from being sold on the to a traditional consumer instead of an investor. There are greater risks inherent in a property that needs to be renovated and does not meet its highest or best use.

Invest with Hard Money Loans

The HML or bridge loans are only made to real estate investors on commercial and residential properties that will only be used by the investor as an investment (not owner occupied) property. This is to keep in line with the laws of usury and predatory lending. To charge higher fees and interest rates to consumers is illegal. Real Estate Investing is a business. Businesses are should know enough to determine the risk and reward of an investment and therefore have no “consumer protection” like predatory lending. Business owners can determine which course of financing they would pursue and if the cost are justified by the potential reward. I would never finance my home or suggest anyone to do so using a HML. There are situations I would invest in a short sale property that I can purchase at 30% to 50% below the true market value even if it costs me 10% in fees and double the normal interest rate. So even assuming this adds 15% to the costs I would still be way ahead when I refinance or sell the property.

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If you are starting up a new business or wanting to expand an existing one, chances are you will need financing. Whether looking to buy property, machinery, material, or other high cost items, getting the financing to do so can be tough in today’s economic climate.You will find this to be especially true when trying to go through a traditional bank. Even if you are able to get the funding that you’re looking for, you will be waiting for months before the loan finally gets funded. In the recent past, the number of borrowers that have defaulted on their loans has risen drastically. For that reason, banks are being much more cautious before financing any business venture. They are going to be very picky when they do credit checks. If there are any issues, they are going to be quick to turn you down.

Fortunately there are still options for getting financed. Due to the banks refusing to provide funding in today’s economy, a lot of loans are being privately funded. Many private lenders will lend their own money for their own portfolios. These lenders are generally funded by hedge funds or wealthy individuals with large pools of capital. The breakdown of the collateralized mortgage bond market has not crippled these unique lenders. Originating loans is not an issue for them because they don’t have to worry about who may or may not want to buy them. Another benefit to private loans, or hard money loans is that they take a very short amount of time to close, as opposed to conventional loans which often take a few months to fund if you are even able to get the approved. You generally don’t have to worry about a loan committee or huge stacks of paperwork. There are no complex ratios to deal with either. If they like your deal and you have shown them that you can pay back the loan back, then usually they will close your loan no matter how things are going in the conventional marketplace.

Do not get discouraged due to the fact that the conventional mortgage industries aren’t willing to offer financing because there are plenty of commercial mortgage lenders that are able to fund your deal

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Why A Hard Money Loan.

The reason real estate investors choose to use hard money loans is that they are a source to purchase and rehab property to make a substantial profit that they may not have without the use of this expensive money. These short term loans are expensive and even if they were legal for a home owner to borrow from the private lenders offering these loans it would never be advisable. So how hard are these short term loans, you ask? The answer is threefold. They are restrictive in loan to value, they are high in rate and high in fees.

Restrictive in Loan to Value.

The maximum loan to value for most private loans range from 50% to 75%. No deals are done at the higher loan to value for two reasons. First the hard money lender requires lots of equity in case of default they can list and sell the property quickly because they will in theory be below market value. The reason I say in theory is because there are so many REO’s, Short Sales and foreclosure properties on the market today that what was normally considered an exceptional deal is common place. Therefore, private lenders are more particular about the properties, borrowers and loans they choose to fund.

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