Real Estate Investors need a consistent flow of capital in order to purchase new properties.
Sure, some of them have cash in the bank, and those are the fortunate ones.
But what about the smaller investor that depends on credit and bank loans?
Many investors, especially owners of multiple properties, felt a hard hit in the financial crunch of 2008.
Values dropped to nearly nothing, and a lot of investors were forced to liquidate some of their properties.
In some cases they even had to give their property up to a foreclosure or short sale. These times were not pretty.
Unfortunately, this led to lines of credit being lost and a more stringent loan approval process.
These events devastated many small investors, and pushed them straight out of the markets.
However, the seasoned investors still remained, and many decided to turn to the use of hard money.
For starters, let’s take the case of Khoi Senderowicz from Oakland, California.
She was in desperate need of capital to rehabilitate her run-down properties, however a recent foreclosure caused her credit to tank.
She experienced problems with a home-equity-loan from the bank, so she decided to take a private investment loan.
Senderowicz borrowed $200,000 against her duplex property she owns in Montclair, which has substantial equity.
The loan came with a heavy price tag of 12% interest, which is almost triple today’s rates, but was well worth it. “I feel like I’m able to breathe again”, she was quoted as saying.
The bottom-line is that a hard money loan just “works” for investors these days.
And the majority of hard-money borrowers are professionals, not owner-occupants, so there’s no real concern that it might be another form of sub-prime lending.
Guy Cecala, publisher of Inside Mortgage Finance, says “Real Estate Investors are being blacklisted by the conventional mortgage market because they are deemed as too high-risk. Investor loans defaulted at 3 times the rate of owner-occupied during the credit crunch so everyone is gun-shy. This creates a real opportunity for hard-money lenders.”
Beyond the Horizon Construction in Oakley, CA owner Josh Roofener was quoted as saying “Hard money is definitely more expensive, but it gets you the cash quick in the time frame you need it most.
My all-cash offers using hard money are always stronger than those who have to jump through hoops to get a traditional loan.”
If you think about it, 12% really isn’t too unreasonable for a loan. Credit cards are charging the same amount, but just dish out the money in smaller proportions.
And you will never get a tax write-off with a credit card, like you would off the interest of a home loan.
A lot of hard money loans are available within 24 hours, and selling a property in days is probably the biggest reason investors use it.
It’s all about supply and demand, and right now private investment loans are meeting a need in the market.