Investing in real estate can be a lucrative avenue for building wealth, and it’s an effective way to diversify your portfolio. Real estate investment trusts (REITs) and real estate crowdfunding allow you to invest passively, but some investors may prefer to own property directly.
If you’re not comfortable parting with a substantial amount of cash up front to purchase real estate, a hard money loan may be the answer.
How Hard Money Loans Work
Hard money loans, sometimes referred to as bridge loans, are short-term lending instruments that real estate investors can use to finance an investment project. This type of loan is often a tool for house flippers or real estate developers whose goal is to renovate or develop a property, then sell it for a profit. Hard money loans are issued by private lenders rather than mainstream financial institutions such as banks.
Unlike traditional bank loans, the ability to obtain hard money financing isn’t determined by the borrower's creditworthiness. Instead, hard money lenders use the value of the property itself in determining whether to make the loan. Specifically, lenders focus on the “after repair value,” or ARV, which is an estimate of what the property will be worth once the renovation or development phase is complete.
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