Financing an investment property can be trickier than a residential one. It is even more difficult if the property needs significant renovations. Real estate investors can turn to hard money loans when conventional financing is not available. A hard money loan is a short-term loan by a private lender. The lender gets paid interest during the length of the loan and can charge origination fees before the money is disbursed.

While a hard money loan is not typically the first choice for investors, it can have advantages. Here are the benefits and the drawbacks of financing an investment property with this type of loan:

Pros

Quick Access

Private lenders offering hard money loans are not as interested in the borrower’s credit history. They primarily want to know the value of the collateral used to secure the loan. That means you can access the funds quickly, which is advantageous if you are in a bidding war for a property.

Minimal Down Payment

Hard money loans typically do not require much of a down payment like conventional loans might. Your only upfront cost is the origination fee.

Ideal for Beginners

New investors can often use a hard money loan to purchase their first few properties. Once they are established and have proven success, access to less costly loan options may become available.

Cons

Higher Interest Rates

Since this type of loan can be risky, lenders charge higher interest rates to protect themselves. Lenders also know hard money loans are most likely the last resort for a borrower, so they will likely be willing to pay the interest.

Risky Stakes

If you are unable to repay the loan, the lender will take possession of the investment property. Not only will you lose the property, but it will not look good on your credit history.

Short Loan Terms

Hard money loans are not meant to be long-term solutions. Once you have borrowed the funds, you may only have a few months to repay the money. If you are flipping a property, it is vital to stay on schedule.

If appropriately used, hard money loans can be an excellent tool for property investors. Work with the same lender on multiple deals and establish a relationship. They may be willing to grant more favorable loan terms. The loans can serve as a bridge to help you build an investment portfolio and eventually gain access to more permanent financing solutions.