It is often said that hard money is easy to get. Such statements are misleading in the sense that lenders do not pass out money willy-nilly. Hard money loans might be easier to obtain compared to traditional funding, but they certainly don’t constitute free money. Investors need to bring something to the table. That something includes experience.
The reason hard money is easier to arrange is the fact that lending criteria are not as stringent. Hard money lenders make approval decisions based on different things. They look at each application through a different lens. But again, they just do not give money to anyone who asks.
How Approval Decisions Are Made
A bank makes approval decisions based on its understanding of an investor’s ability to repay. That’s why banks look at income, assets, debt loads, and credit history. They seek to understand as much as possible about the investor’s financial situation and payment history. They are trusting the information they glean to help them understand whether an investor is a good risk.
Hard money lenders see things differently. Their only concern is getting back their investment along with a decent return. They approve loans based on asset value. To understand this, you need to know that the vast majority of hard money loans are utilized by investors to purchase real estate.
When an investor applies for a loan from Salt Lake City, Utah’s Actium Partners, Actium wants to know how much the property is worth. They also want to know its value in relation to the amount the investor is asking for. If the property’s value is high enough to cover the loan and its associated expenses, Actium’s risk is minimized.
The Experience Factor
So, what about experience? Hard money lenders do not look into an investor’s financial details. But they need some sort of assurance that the investor knows what they are doing. So, they look for real estate experience. They look for a reasonable demonstration that an investor understands the market, knows what he is doing, and has a good track record of managing his investments.
Sufficient experience in real estate tells the lender that an investor poses a limited amount of risk. It also sets the lender’s mind at ease. With sufficient experience and the financial assets to back it up, an investor should not have a hard time arranging loans.
On the other hand, a lack of experience could influence a lender’s ability to approve. Less experience could mean a loan application gets rejected, or it could mean approval but with a hired down payment, shorter terms, and higher interest rates.
How Experience Is Demonstrated
By now you might be wondering how an investor would demonstrate his experience. There are a couple of ways. The first is his track record of previous investments. It shouldn’t be hard to produce documentation to that effect. Likewise, an investor should be able to produce documentation proving his ability to manage current assets.
Another means of demonstrating experience he’s showing proof of cash equity and/or total investments already in play. If you are an investor with a decade of experience and more than $250k in current investments, you are in good shape in terms of experience. Throw in a few hundred thousand dollars in cash equity and you are golden.
A ton of experience isn’t necessarily required to secure hard money. But at least some is. The more experience an investor has, the more comfortable hard money lenders are doing business with him. In a nutshell, experience can really pay off in the hard money game.
