Why Some Deals Shouldn’t Be Funded By Hard Money

Investing in real estate is a great way to earn income. Whether you’re looking at a fix-and-flip or a long-term rental investment, there are plenty of ways to make money through real estate. That said, there are also plenty of ways to finance investment properties, whether you go with a traditional mortgage loan or a hard money loan. However, some loans are better suited for certain investments. Today, we’re reviewing when to use a hard money loan and why some deals shouldn’t be funded by hard money. 

Contents of This Article: 

• When Should You Use Hard Money?
• What Properties Shouldn’t Be Funded By Hard Money?
• Pros and Cons of Using Hard Money
• How to Choose the Right Financing Option
• Find the Right Lender for Your Investment Today

When Should You Use Hard Money?

Maryland hard money loans can be a great financing choice–but only in certain situations. They’re best for short-term investments where speed and flexibility play a major role instead of interest rates. For instance, investors often use hard money for fix-and-flip projects, auction purchases, or when they don’t qualify for traditional financing. 

Because these loans are based on the property’s value rather than the borrower’s credit, they’re ideal when time is limited or a deal needs to close fast. However, using hard money successfully requires a clear exit strategy. Some of the most popular strategies include selling the property quickly or refinancing with a long-term loan. 

The high interest rates and short repayment periods can quickly become overwhelming without a solid plan. That’s why hard money should only be used when the investment has strong potential and the investor is prepared to move quickly and manage risk. 

What Properties Shouldn’t Be Funded by Hard Money? 

While hard money loans offer fast and flexible financing, they aren’t ideal for every property. For instance, some properties that usually shouldn’t be funded by hard money include: 

• Long-term rental properties
• Primary residences
• Properties in declining markets
• Complex renovation projects
• Unpermitted or illegal structures
• Properties with legal or title issues

Properties like these typically don’t align well with the short repayment periods and high interest rates of hard money loans. That said, most of these types of properties are better suited for traditional financing options with lower costs and longer repayment terms. 

Additionally, if the property’s value is uncertain or you don’t have a well-thought-out exit strategy, it’s usually too risky to use hard money. In these cases, the potential costs may outweigh the benefits. 

Pros and Cons of Using Hard Money

Hard money loans can be a great tool for investors. However, like any financing option, they come with a few pros and cons. Here are some of the things to consider if you’re thinking about taking on a project funded by hard money.

Benefits of Using Hard Money

• Fast Approval and Funding- Hard money loans are generally approved and funded quickly, usually within a matter of days. This makes them great for fast-moving deals where you wouldn’t have the time to wait for traditional financing.
• Flexible Loan Terms- Since hard money loans are issued by private lenders or companies, they usually come with more flexible, negotiable terms compared to traditional loans.

• Asset-Based Lending- Approval for hard money loans is mostly based on the property’s value, not your credit score. So, even if you don’t have amazing credit, you can still get a hard money loan.

Disadvantages of Using Hard Money

• High Interest Rates and Fees- Hard money loans come with significantly higher interest rates, points, and origination fees compared to traditional financing. This is something you’ll have to budget for if you’re using hard money.
• Short Repayment Periods- Most hard money loans must be repaid within 6 to 18 months. Unfortunately, this can dig into your budget or potential profits if you don’t plan carefully enough.
• Higher Risk of Default- If the property doesn’t sell or refinance quickly, it may become hard to make payments because you don’t have the income you expected. This also puts you at risk of foreclosure or losing your collateral.

How to Choose the Right Financing Option

Choosing the right financing option for your investment takes some careful consideration. You’ll want to consider your investment goals and timeline for your project. For instance, a hard money loan may be a good choice if you’re planning a quick flip or need fast approval to secure a fast-moving deal. However, traditional financing offers lower interest rates and more manageable repayment terms if you’re purchasing a long-term rental property or primary residence. 

If you’re trying to decide the best option for your investment, you’ll want to consider key factors like loan costs, approval time, repayment flexibility, and your exit strategy. That said, it’s important to compare multiple loan types, like conventional mortgages, private money, or even seller financing, which can help you find the option that best supports your investment.

Find the Right Lender for Your Investment Today

Wondering whether or not your investment project can be funded by hard money? There are several things to consider before choosing this financing method.

For instance, traditional financing may be a better option if you’re looking at purchasing a long-term rental property and you’re not looking to sell the property within a short matter of time. However, a hard money loan may come in handy if you’re taking on a fix-and-flip project and plan to complete it within 6 to 18 months. 

Once you have your plan and investment goals in mind, the next step is to find a lender. Maryland Hard Money Lenders can help you get funded quickly and efficiently. Our team of real estate loan professionals can help you get the funds you need to start your project. Learn more about our lending process, or fill out our loan application today!