If I were a first-time investor, and if I had a chance to buy and sell a property for a sizable profit, I would try to get the necessary capital, at the best terms, to make this deal possible.
Here’s the problem, though: It’s unlikely that a bank, in this market, would lend to me. I would have no portfolio of successful investments to show a lender. I would have nothing to convince a bank they should risk lending to me.
But what about that property I want to buy? The one where I can make a double-digit profit and sell it within a matter of weeks? If a bank will not lend to me, and if I do not have enough money to close this deal, I need to find another kind of financing.
Here is where short-term, asset-based financing, frequently called hard money loans, can help a real estate investor. I would definitely accept a loan from a hard money lender in this example above.
Hard money lending has an unjust reputation as an avoid-at-all-costs source of capital. In my experience, blanket statements like that have zero context.
Is there a place for hard money lending? Absolutely. Is hard money lending suitable for all investors? Of course not.
But the attacks against hard money lending lack any discussion of the intended use of this loan, or why the borrower or investor seeks to pursue this form of financing. I have an interview on www.blogtalkradio.com on this topic of hard money lending you may want to listen to. You can click here to hear the interview.
I remind people in the interview that context should always govern what you do, in business and life.
Here’s a good example of something similar to hard money lending, where there is hardly any stigma about the source of money: Entrepreneurs who max out their credit cards from banks that charge huge interest rates, all in an effort to launch the next great tech company.
The media do not attack Visa, American Express and MasterCard for charging these wannabe successors to Steve Jobs big interest rates and penalties. In fact, borrowing from credit cards to finance a startup, until a round of angel investment or venture capital comes through , is almost a rite of passage in Silicon Valley.
Those credit cards are not Good Samaritans, compared to hard money lenders. But again, context is everything.
In the world of residential real estate, we need to understand all the options available to us. We need to know when and why hard money lending should be an option of first resort.
If we do not know the context of the situation, there is no reason to champion or condemn hard money lending. It remains an option for real estate investors.
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