When you need cash for a real estate deal, to cover payroll, or to bridge a gap with another loan, you have several pathways. Depending on your situation, traditional banks, private individual lenders, and private hard money lenders may all be viable options. However, this wasn’t always the case. Before private hard money lenders existed, your only choices were to work with a traditional lender or find a source of funds from a private individual or organization.
History of Lending Options
Before banks existed, the only option for getting a loan was through private individuals. They had total freedom to define the interest rates and terms, which often meant exorbitant fees or terms that left the borrower trapped in a cycle of debt. If there had been no changes to lending practices, it’s hard to imagine the current reality that allows both first-time and seasoned investors to capitalize on opportunities that allow them to be profitable.
Regulations were eventually put in place to combat these practices and protect borrowers, leading to the conventional banking system we know today. Conventional banking has been around for centuries, with the most significant changes happening in the 20th century with the emergence of modern technology.
Banking regulations, which were tested mightily during the financial crisis in the early 21st century, have rigid requirements for lenders and borrowers. Although the intention is to protect both parties, banking regulations can make it challenging for certain types of borrowers or projects to get funded.
Private hard money sits in the sweet spot between private individual lenders and conventional banks. Originating after the banking industry collapsed during the Great Depression, private hard money loans are backed by real estate. Because they are not regulated in the same way as conventional banks, hard money funds have more freedom to choose who they lend to and what types of projects they will finance. Because there is some degree of regulation with hard money, borrowers can feel more confident working with private hard money lenders or funds than they do with private individual lenders.
What if Private Hard Money Didn’t Exist?
Without having hard money lenders in that sweet spot, many entrepreneurs and real estate investors wouldn’t have the same opportunities. If you were limited to working with a conventional lender, every loan would take at least 30 days, putting you at a disadvantage with competitors who have cash on hand. Conventional lenders also have limits on the types of loans they can offer, making it more difficult to purchase multiple properties or distressed properties that have profit potential after improvements are made.
If you chose to go the route of private individual lenders, you would first have to identify suitable lenders and then build relationships with them. With a private individual lender, you may also be limited to fewer loans because of higher interest rates, stifling your opportunities for growth.
The Benefits of Working with a Private Hard Money Lender
When you choose to work with a private hard money lender, you get several benefits that you won’t get with a conventional bank or private lender.
Speed
Many hard money lenders have programs that allow you to close in five days or less, so you can get cash fast to stay competitive in the real estate market. There is also less paperwork than with conventional lenders, so the application process is faster for you.
Regulation
Hard money lenders must be licensed, which is not true of private individual lenders. This gives you some protection, so you can borrow with confidence. Look for a direct lender that actually provides the loan so you don’t have to go through a middleman.
Flexibility
Private hard money lenders can extend unique loan terms that conventional lenders are not able to offer. They also offer relaxed underwriting guidelines, with equity being the primary qualifier, which means that financial statements, credit history, and income are not requirements. Hard money lenders also have the freedom to operate in business areas that are too risky for banks, such as cannabis businesses, gentlemen’s clubs, churches, and so on. You can also work with a private hard money lender to purchase properties that don’t qualify for conventional loans, which is one reason they are so popular with real estate investors.
Socotra Capital: Your Hard Money Partner
Fortunately, we don’t live in a world where private hard money doesn’t exist. With Socotra Capital, you can get loans for investment activities that conventional banks simply aren’t allowed to fund without having to build relationships with private parties. If you have equity, we can usually find a loan pathway that works for you, sometimes in as few as five days.
To learn more about hard money lending and how it can work for you, read Hard Money 101: A Guide for Real Estate Agents, Mortgage Bankers, and Mortgage Brokers.
