The Advantages and Disadvantages of Using Hard Money Loans for Commercial Real Estate

Hard money is a popular option for commercial real estate investors who need cash fast or, for various reasons, don’t want to use traditional lending. These loans are provided by private lenders, not banks, and while this gives them a lot of unique advantages, there are a few disadvantages that you should be aware of, too. 

This article will discuss the key benefits and setbacks of hard money loans, so you can decide whether or not they’re right for your next project. 

What is Hard Money Loans?

Hard money loans are short term finance solutions that are typically secured by real estate. What makes them unique from traditional financing is that they don’t rely on your creditworthiness and financial history. Instead, the loan amount is offered based on the value of the property being used as collateral.

These loans are a good choice for commercial real estate investors who want to rehabilitate or develop a property, as well as to bridge a funding gap.

Advantages of Hard Money Loans 

The key advantages of hard money loans are:

Fast Approval

One of the biggest reasons why hard money loans are so popular for commercial real estate projects is their speed of approval and funding. Applying for a traditional loan can take weeks or even months, while hard money loans are generally approved in days, so they’re perfect for tight deadlines.

More Accessible

Because hard money loan approval is based on the property’s value and not your credit profile, this type of loan is an option to consider if you don’t qualify for traditional financing.

Flexibility in Terms

More good news for commercial real estate investors: private lenders offering hard money loans aren’t bound by the same rules as traditional lenders. That means they can offer more flexibility in their lending, so you can tailor the loan terms to your project’s timeline and expected returns.

High Return Projects

Finally, hard money loans can provide the financing you need to take advantage of high-return projects. Let’s say you have your eye on a distressed commercial property with huge resale potential. While it might not qualify for traditional financing, you can use a hard money loan to fund the opportunity and (hopefully!) make big profits.

Disadvantages of Hard Money Loans

The potential setbacks of hard money loans for real estate investing include: 

Higher Costs

Unfortunately (but not surprisingly), the speed and accessibility of hard money loans comes at a cost. Interest rates are higher than traditional loans, often 8%-15% or more. And you’ll also have to pay higher upfront costs, origination fees, and other closing costs. That means these loans may not be beneficial for projects with thin margins.

Short Repayment Terms

Another possible issue with hard money loans is that they’re short-term financing solutions, with repayment terms from 6 months to 3 years. This works well if you plan to sell or refinance the property quickly, but it can be a challenge, not to mention risky, for projects with longer timelines.

Risk of Losing Collateral

Because hard money loans are collateralized by the property, if you can’t meet the repayment terms, the lender can seize the asset. Hard money loans are riskier than conventional financing, especially for complex or unpredictable projects.

Hard money loans can give you financial flexibility for commercial real estate projects, but that doesn’t mean they’re right for everyone. When you understand the pros and cons of this type of financing, you’ll be better equipped to make smart decisions for your business.

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