You may be new to hard money loans, but you’ve heard enough about them to know they can be useful tool for real estate investors. It’s true: hard money loans can be extremely beneficial for people who want to invest in real estate but who don’t have a lot of upfront cash.

Getting a hard money loan can be a smart financial move, but if you’re not familiar with all of the ins and outs of this type of loan, it’d be easy very easy to get yourself into a bind. Following is a list of must-have info regarding hard money loans.

A Hard Money Loan is A Short-Term Real Estate Loan

Hard money loans are loans lent by individuals or groups of investors to investors looking to obtain short-term real estate loans. Investors use the loans to buy property that they will most likely rehab before selling again at a profit. Hard money loans are a great option since it’s usually quite difficult to get a real estate investment loan from a traditional bank.

Interest rates are higher with hard money loans.

Hard money loans come with higher interest rates than traditional loans. This is because hard money lenders are taking a lot of risk backing short-term real estate, so charging a high interest rate will help them absorb some of that risk. Interest rates can go up to 15 percent and higher.

Keep close tabs on your interest rates so that you’re fully aware of what you need to pay when the loan comes due at the end of the term. Some hard money loan companies don’t require you to make any interest or principal payments during the loan term, allowing you to make one giant balloon payment at the end. Some people prefer to keep making interest payments all along so that they pay less at the end. Figure out what makes sense to you based on your specific circumstances.

Many types of real estate can be purchased with hard money loans.

Hard money loans can be used for different types of short-term real estate deals. They can be used to buy multi-family residential buildings, commercial buildings, single-family residential buildings, industrial buildings, and even land. Choose your hard money lender depending on the type of deal that you’re trying to do. For instance, you may find a hard money lender who specializes in lands deals. Stick with that type of person if you are purchasing land. Specialists know the ins-and-outs of their category, and they can help you avoid major issues down the road.

Understand the the hard money loan to value ratios

The loan-to-value ratio is the amount of the loan that the lender is able to lend to you, and it’s determined by the value of the property. Most hard money lenders will lend anywhere between 65 and 75% of the amount the property is worth when you purchase it and before you repair it. If they lend you money based on the value of the property after you repair it, that’s a loan base do the “after repair value”, or ARV.

Look carefully for a hard money lender to work with.

It’s really important that you work with a reputable hard money lender. The industry isn’t federally regulated, which means that unscrupulous lenders are out there. In order to avoid being matched up with the wrong lender, visit real estate investor club meetings in your area. Speak to people who have worked with hard money lenders before and find out who they recommend.

Have a contingency plan in place if your property does not sell at the end of the loan period.

Hard money lenders expect that you will pay a full balloon payment at the end of the loan period. Hard money loans have six month to three year periods,after which the loan comes due. The assumption is that at the end of the loan period, you will be selling the property and paying the lender back. If you haven’t sold the property by the time the loan is due, you’re going to have to either refinance the loan or come up with some other option. Have your contingency plan in place before you move forward.