Whether you're a developer (one who builds spec homes to sell) or a "flipper" (one who buys a distressed property such as a foreclosure to fix up and resell), having cash on hand to keep the ball rolling can be a challenge at times. When a property doesn't turn over like you expect, it can tie up money you need to start a new project or to ensure the current one is completed. While a traditional loan could be used, this type of loan isn't designed to give you what you need when you need it. A tool you could use and could be just what you need is a private capital loan or hard money loan.
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Here are some advantages of getting a hard money loan instead of a traditional loan:
1. Traditional loans are designed to be paid off in 15 to 30 years. Developers and resellers don't need to be tied to loans for a long period and hard money loans are designed to be paid back within 1 to 3 years.
2. Hard money loans are tied strictly to collateral which means much of the paperwork for credit checks, etc. is eliminated. Instead of taking several weeks to receive funding as with a traditional loan, hard money funds are available usually within a few days.
3. When paying off a traditional loan, if you pay it off early, you usually have to pay a penalty. With a private capital loan, they expect it to be paid off early so there is no penalty involved.
4. Even though a hard money loan has a higher interest rate than a traditional loan, since it's a very short term loan comparatively speaking, it's actually cheaper than a traditional loan.
5. Although bridge loans are intended to be short term loans, if something happens and the loan needs to be extended, doing so is extremely easy. You usually have to completely refinance a traditional loan if you want the loan terms to be extended or changed.
6. While traditional loans are designed to finance almost the entire amount of a property, capital loans usually only finance 60% to 70% of the property value. This means you don't have to borrow more money than you need to accomplish your goals.
7. A bridge loan is designed to help with a short term situation where other financing is being sought. This enables a developer or reseller to acquire land or a property quickly while longer term financing is secured. Traditional loans take far too long to acquire for such a quick process.
Traditional loans are usually from a public institution such as a bank or a mortgage company which means they have to be careful with their capital as it is "public" funds. A private capital loan is financed by a private company which can be more speculative with their money. This means you can get a hard money loan or bridge loan when a traditional lender won't lend. You can't beat a hard money loan when used as a tool to become more successful.
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