If you’re new to property investing or you’re just looking into methods of financing your investments for the first time, you’ve probably come across hard money lending. 

 

A lot of real estate experts recommend using hard money as one of the best financing options for property investing, but they don’t usually break it down in a way that’s beneficial for beginners. 

 

If you’re looking to learn more about hard money lending, this article breaks down four things that real estate experts often won’t tell you about this option, so you can decide whether or not it’s right for you.

1. You Can Get Approved Without Good Credit

Many real estate experts will tell you that it’s easier to secure a hard money loan than a traditional bank loan, but don’t explain why. Essentially, this is because hard money lenders care more about the value of the property than your credit score. 

 

Obviously, this can be beneficial, but it’s worth remembering that you’re still taking on debt, and if the deal goes south, lenders won’t hesitate to take the property back. Just because the process is easier doesn’t make it less risky.

2. The Loan Terms Are Shorter Than You Might Think

Something else that real estate pros often don’t explain is the lending period for hard money loans. 

 

Most hard money loans run for 6 to 18 months, which, naturally, creates a bit of pressure—especially if your renovation runs late or your property doesn’t sell as quickly as you expect it to. You’ll want to make sure you’re confident about flipping your property quickly or refinancing soon if you’re planning to apply for a hard money loan.

3. Rates & Fees Add Up Fast

An expert in real estate might skim over the fees and rates involved in hard money lending, but this is something you need to be aware of when you’re calculating your budget for an investment project. 

 

In most cases, you’ll probably end up paying double-digit interest along with processing fees, as well as penalty fees if you extend the loan or even if you pay it off too early. That’s why it’s important to read every line and ask about every fee before you take out a loan, so you know exactly what you’re signing up for.

4. You’re Expected to Have an Exit Plan

Finally, something that real estate experts often gloss over is that when you’re applying for a hard money loan, you’ll need to have an exit plan. 

 

Lenders want to know exactly how and when you’ll repay them, which means you’ll need to be able to demonstrate what you plan to do with your property (i.e., selling it or refinancing into a long-term mortgage) once you’ve used the loan for its intended purpose. If you just say you’ll “figure it out later,” you’re most likely going to be turned down.

Final Word

So, it’s not all positive: there are several pros and cons of hard money to be aware of before you commit. 

 

The final thing to keep in mind might not be exactly what you want to hear: the people who benefit most from hard money loans are already active in real estate. These people know how to move quickly and absorb extra costs simply because they already have the experience. 

 

That’s not to say that you can’t join these people—but if you’re brand new and think that hard money lending is your shortcut into flipping, it’s best to step back and get a few traditional deals under your belt first.