The term “hard money” sometimes seems to loom in the shadows like a scary monster, but in reality hard money is neither scary nor a monster. In fact, it can often be a commercial real estate investor’s best friend, providing financial assistance quickly in times of need. The “hard” in hard money does not refer to the difficulty required to obtain these loans, but merely to the fact that they are secured by “hard” or “real” assets and result in “hard” cash. Hard money loans are also known as private capital loans because they are funded by private individuals or small groups of investors rather than by an institution or bank lender. They are also sometimes called “Bridge Loans” because they are relatively short term (i.e. one to 3 years) and designed to help a borrower get to point B from point A when traditional lenders are not willing to help. To better understand what hard money loans are, here are five debunked myths explaining what they are not.

5 Hard Money Myths

• Hard money loans are only for the most desperate borrowers. The myth that anyone seeking financial assistance outside of the mainstream lending system must be doing so out of desperation is one of the most difficult to dispel. While hard money lenders will make loans to those with less than stellar credit histories, the vast majority of investors who use hard money loans are savvy businesspeople who know the benefits of using hard money and dealing with a private lender rather than dealing with the red tape of an institutional lender. Simply put, hard money loans are for borrowers whose real estate projects don’t fit inside the bank’s guidelines or those who need money faster (less than a month) than a bank can give it to them (often three months or more).
• Hard money lenders are no better than loan sharks. Also known as private money lenders, hard money lenders are business owners themselves. Their focus is on the value of the property rather than the credit history of the borrower; as such they are invested in seeing the project succeed. Reputable private money lenders want good word of mouth to get them new as well as repeat business, so they are typically willing to work with borrowers to structure loans that benefit both parties. In addition, reputable hard money / private money lenders will happily provide references to potential borrowers, making it easier for borrowers to distinguish the good lenders from those who are just interested in collecting fees.
• Hard money loans cost more than traditional ones. This myth doesn’t take into account the money that can be made by obtaining financing in a speedy timeframe. While it is true that interest rates for private loans are higher, these costs are offset by the timeliness with which you can receive your money as well as by the potential to receive higher loan amounts based on improved or projected property values rather than current market value if a property is in need of renovations or upgrades. It’s important for borrowers to weigh the costs of obtaining the hard money loan against the costs of waiting for a bank lender to provide (or perhaps turn down) the same funds. The higher interest rates are the trade-off for the increased risks that private lenders are assuming. It’s also important to keep in mind that other closing costs, such as points, can actually be the same or less than those charged by conventional lenders.
• Hard money loans have extremely severe and stringent terms. This myth couldn’t be further from the truth. In actuality, private money lenders are much more able, and willing, to negotiate their terms with borrowers, because their hands are not tied by regulations as banks and other institutional lenders are (not to mention the infamous bank “loan committees”). It is even possible in some situations to negotiate borrowing sufficient additional funds to cover interest payments for the term of the loan. The objective of any hard money lender is to ensure that they receive a sufficient return on their investment to pass along to their investors. They tend to be more flexible in how they structure loans so that their loans fit the projects rather than forcing projects to fit their loans. This is why it’s important for borrowers to maintain open communication with their hard money lender throughout the term of the loan because if trouble arises, an informed lender will most likely be willing to work with a borrower to avoid a default. For example, if a borrower’s exit strategy falls through, most lenders will offer to extend the term of the loan an additional six months to a year to give the borrower time to arrange for a new exit strategy. Try that one with a bank sometime!
• You can’t combine hard money and soft money loans. This might be the biggest myth in need of busting. Savvy investors know that hard money is an important tool in their investing toolbox to be used alongside and in conjunction with traditional (soft) sources of financing. Hard money loans can be used to pay off soft money loans that are about to balloon, or to cash out equity in properties that have had loans partially paid down. Soft money loans also come into play as important exit strategies for hard money loans since they can be used to refinance or to fund construction projects.

Hard money lenders have changed dramatically since the recession and have much more in common now with conventional lenders than with loan sharks and other disreputable lenders. It’s important for borrowers in need of financing for commercial real estate purchases to be aware of the truth about hard money loans and how they can benefit by using these loans to expand their real estate investment portfolio.