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Hard Money: Dancing with the Interest Rate Devil

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HS - Jason Hartman Income Property InvestingBorrowers frustrated by difficulty in qualifying for traditional lending sources are sometimes tempted to turn to hard loans, which is not always a bad thing, but extreme care is a must. There are plenty of legitimate, reliable lenders, and there are others who are little better than loan sharks.

First, a definition. A hard money lender is one that makes short-term loans using the value of the real estate as collateral rather than the borrower’s ability to repay based on personal income or assets. Expect to pay a higher interest rate since these types of loans do not conform to bank standards.

Step 1: Before you even go to the trouble of locating a property, make sure you can qualify for a hard money loan. Since many of these sources exist outside the regulation and relative safety of traditional lenders, you might feel like you’re dealing with loan sharks, and maybe you are. If it makes you uncomfortable, you might be better served by buying some nice, safe treasury notes. (*Caution: Dirty Harry flashback approaching) When it comes to choosing a hard money lender, you’ve got to ask yourself one question: Do you feel lucky, punk? Well, do you?

Step 2: Once you’ve decided that you do, in fact, want to throw caution to the wind and buy investment real estate with hard money, the first step is to locate a piece of property that can be purchased well below appraised value. Usually this means a foreclosure or wholesaled property. Unless he’s been taking drugs, even a hard money lender wouldn’t provide funds for a deal with no room to rehab and flip it for a profit.

Step 3: This step is pretty straightforward. Get in there and rehab the thing as quickly as possible. Remember, you’re paying a high interest rate until you can rent the thing out or get it refinanced at a new, higher appraised value. Many hard money lenders allow you to do this after six months.

Step 4: Rinse and repeat – or not.

We hope it’s obvious to readers that choosing a hard money lender should not necessarily be your first choice when it comes to real estate investing. However, to a new investor low on the funds trying to find a way to get into the game, it is one option. Do we recommend it? As a general rule, heck no! But every situation should be evaluated on its own merits and this strategy certainly can be a handy tool in the right hands.

For anyone offended by the headline up there. Lighten up. We’re not insinuating that all hard money lenders are loan sharks, but you have to admit the potential is there. (Top image: Flickr | Jesse Wagstaff)

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