Are you considering diversifying your investment portfolio or looking to establish one in the upcoming year? Think beyond the traditional stock market and consider real estate investing. While purchasing investment properties is not a new concept, the single-family residential (SFR) sector has more recently emerged as a legitimate asset class—and for good reason with more than 43 million U.S. households currently classified as renters. Nevertheless, many investors don’t have adequate cash on hand to purchase an investment property (let alone multiple properties) outright, which means they’ll need financing to help them achieve their goals. Many investors are familiar with traditional financing options like government-backed Fannie Mae or Freddie Mac loans attained at their local bank; however, there are other options available too, like Private Money and Hard Money loans. Understanding the different loan products and terms will help the investor select the financing solution that best meets their goals.
One of the main differences between hard or private money loans compared to traditional financing is that both are typically asset-based loans, meaning their assessment is based on the investment property rather than the borrower. A few of the pros and cons to consider include:
Typically higher interest rates (around 12%)
Usually short-term (sometimes just 12 months)
Great for fix & flip properties or shorter-term investments with a clear, quick exit strategy
Generally easier to find and qualify for because you as the borrower assume more risk than the lender
Investors tends to pay the interest over the life of the loan and then have a balloon payment at expiration, which is why hard money is often used for fix & flips
Typically lower interest rates than hard money (around 6% or 7%)
Usually longer-term (sometimes up to 30 years)
Often used for buy & hold or longer-term investments
Tend to be more difficult to obtain than hard money loans because of heightened lender due diligence
More information on this topic is available in episode 17 of The Real Investor Podcast. If you’re interested in obtaining a private money loan to help finance your next real estate investment, check out a few of the premier lenders in the space like Colony American Finance or Civic Financial Services to get started.