Hard Money Loans: How They Really Work

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In commercial real estate, the concept of “hard money loans” is frequently used for short-term capital. However, the term can be misleading for some, so we are going to break down hard money loans for borrowers and lenders alike.

Hard Money Loans Are Low-Risk
Of all the forms of commercial real estate lending, hard money loans present the lowest risk. The reason for this is that hard money loans are secured against owned property. This makes hard money loans ideal for projects such as expansions and renovations, as well as fix and flip projects where the property is already owned by the commercial real estate investor. Since most commercial real estate projects see a quick turnaround in revenue, either with more added rental units, new tenants, or through selling, hard money loans pose little risk to both borrowers and lenders.

Property Assessment For Hard Money Loans
When determining the amount of financing offered through hard money loans, the property the capital is being borrowed against must be assessed. This means making a thorough analysis of how much the property is worth, how much equity is in it, as well as existing debts, liens and other liabilities. Overall profitability and how the capital from the loan will be used also determines the amount of financing. If the capital used from a hard money loans is going to improve a property in order to increase revenue from renting or selling, the amount of financing made available may be higher.

Hard Money Loan Conditions
Terms and interest rates are standard in any loan, but hard money loans take other considerations into account. Since hard money loans use property as collateral, lenders need to also consider whether the property requires any form of fire or flood insurance, if personal guarantees are required, and what events will trigger a default event on the loan. Contingencies are also sometimes included in the loan agreement to account for successors, transfers, and assigns, and whether or not there are any penalties for prepayments.

At METRIX Capital Group, we make the lending process as transparent as possible. We aim to educate lenders and borrowers on the processes involved in arranging hard money loans and other financing programs, so that agreements are beneficial to all parties involved.