Hard Money, Private Money and Transactional Funding
Real Estate Investing Resources
There are a lot of ways to make money investing in real estate. Some take little or no cash, but the most profitable require short-term funding for wholesaling and fix-and-flip. These loans are from private parties, other investors, and companies specializing in short-term funding for real estate investment projects. Developing these type of resources before you need them is the way to go. You will want a funds availability letter when you're about to make a purchase.
Hard Money Lender
Hard money lenders are companies that loan money to fund real estate investor transactions for the short term. Let's say that you're doing a rehab flip, buying a property, renovating and repairing, and selling to another investor. You need cash to fund the purchase and rehab work for a short period of time, perhaps weeks to a month or so to get the work done.
You would get a hard money loan guaranteed by the property to fund your activities. At the closing when you sell the property, the hard money loan would be paid off and you would keep the remainder of the proceeds as your profit.
Private Money Lender
Used for the same type of transactions as you'd use a hard money lender, private lenders can be individuals or small groups who invest money short term. Private money could even be a loan from a family member to fund a deal to completion. Again, this would be for a short term situation, usually a property flip or wholesale transaction.
Both hard money and private money lenders charge higher interest rates and fees. There can be up-front and closing points, and these are expensive loans. However, if the deal is profitable, these type of loans are often the only way to get a deal done.
Transactional funding is used in wholesaling to fund the first deal in double closings.
An example would be a deal where you're wholesaling a property to another investor, and you can schedule back-to-back closings, but can't use funds from the second closing to fund the first. This is common, as many title companies will no longer allow cross-funding deals.
You would get a transactional loan from this lender that is paid at closing directly to the title company to fund the first deal where you're buying the property. When the second deal closes, usually the same or next day, this lender would be paid off.
Short-Term High-Cost Lenders Have a Place
When a deal has enough profit in it to offset risk and the cost of short-term loans, then having these type of lenders on your real estate investing team is really important.
Transactional loans many times are paid off in hours, yet can add $2,500 or more to the cost of the deal. The loan fee is high, but the value is clear; without that loan, you couldn't close the first deal to sell the home in the second one.
Researching and contacting hard money, private money, and transactional funding sources is important, as you'll usually need them in a hurry. Don't wait to do the research until you have a need. The best deals are often accompanied by a short open window of opportunity.
You don't want to miss a great deal while you're seeking financing.