Choosing where to invest your hard-earned money is not a decision to be made lightly. You want to get the most from your investments, but everybody has unique circumstances, including risk tolerance and the potential need for liquidity. Knowing where you fall on the spectrum is important for making the right choices for your portfolio.
Let’s take a closer look at hard money construction loans to help you decide whether you should invest in this asset class.
What Are Hard Money Construction Loans?
When developers or builders get denied by traditional lenders, or if they just want faster access to funds, they often turn to hard money lenders. A hard money construction loan is essentially a private loan for the sole purpose of building or renovating a structure. The intent is for the loan to be paid back upon completion of the project, when the builder or developer converts to a traditional mortgage.
These loans are provided by funds that specialize in them, and the capital pool comes from investors like you. Borrowers are vetted and have to meet certain requirements to reduce the risk of default. The loans are also backed by real estate collateral, so if a default does occur, there is some recourse to recoup the investment, which helps reduce the risk for investors.
Why You Should Consider Investing in Hard Money Construction Loans
Investors choose assets based on a number of reasons including interest in a particular industry, potential returns, and experience in a particular area. Whatever your motivations, it’s important to understand whether a particular investment is the right fit for you.
1. Higher Returns but Higher Risks
Hard money construction loans often offer higher interest rates compared to traditional loans, potentially leading to higher returns for investors. However, these loans also come with higher risks due to the nature of construction projects and the financial stability of borrowers. Understanding the risk-reward balance is crucial before investing.
2. Short-Term Investment with Quick Turnaround
These loans are typically short-term, ranging from a few months to a couple of years. This can be advantageous for investors looking for quicker returns. However, it's important for the lender to thoroughly vet the borrower’s plan, ensuring the project's timeline and budget are realistic to prevent any unexpected delays or costs.
3. Collateral and Due Diligence
Hard money construction loans are secured by real estate collateral, providing a safety net for investors. Conducting thorough due diligence on the property, the borrower’s track record, and the project's feasibility is essential. Lenders will assess the property's value, the borrower’s experience, and market conditions to make informed decisions. Fortunately, when you invest in a fund, they do all of this work on your behalf.
4. Borrower Profile
The borrowers who get hard money construction loans are professionals, either developers or builders who have experience in their fields. Fund managers evaluate both their track record and the specific details of the project to assess the risk.
5. Productive Asset
As a productive asset, investing in hard money loans allows you to generate cash flow and add to your monthly income with an investment that delivers predictable returns. In contrast, a scarce asset like gold has the potential to yield a return on your investment, but it depends on how that value fluctuates over time. You also have to sell the asset at the right time to make a profit. Hard money construction loans allow you to make money on the interest earned, and it starts almost immediately.
Invest in Hard Money with Herzer
Herzer Financial offers a range of investment opportunities, including a real estate investment trust that diversifies both geographically and across different asset classes. Our team approves and services loans with our investors in mind, promoting success at every stage.
Interested in investing in hard money construction loans? Fill out our application today to get started.
