What Is Hard Money vs Soft Money?
Funding your next real estate venture can be complicated and confusing. There are so many options to choose from, but it really boils down to two types of loans:
Soft Money vs Hard Money loans
A hard money loan is secured by the real property you are buying. It has less to do with how credit-worthy you are and more to do with the asset value itself. These loans are usually shorter-term (sometimes referred to as bridge loans) and are mostly offered by private investors.
A soft money loan, on the other hand, is based on your personal ability to borrow the money. Your income and credit score are looked at closely to determine your ability to repay. These loans are usually given out through banks and government institutions, and represent the majority of funding capital for real estate.
What type of loan should you use?
You would typically use a hard money loan for the following:
- Short-term flip
- Money to improve an existing property
- Bridge financing while waiting for soft money approval
- Stave off foreclosure
- Other short-term, time-sensitive projects
Soft money loans are typically used for:
- Personal residence financing
- Long term financing for investment property
- Long-term improvement loans (equity loans)
Hard money pros and cons
- Less time to get an approval (usually)
- Flexible terms
- Sometimes easier to qualify since the property you are buying serves as collateral
- You are typically charged higher interest rates
- Shorter repayment period
- Higher fees and closing costs
Soft money pros and cons
- Competitive interest rates
- Higher loan to value(LTV) means you can use higher leverage
- Longer terms (up to 30 years) gives you a lower payment and potentially better return on investment (ROI)
- Closing costs are often built into the loan
- The approval process is onerous and time-consuming
- Terms are usually inflexible
- Both a high credit score and collateral are usually needed
The best soft money financing sources
Even though credit has tightened over the last few years, banks still compete for your business by offering competitive rates. Soft money in real estate is the exact opposite of hard money. Interest rates are often lower, and even though turn-around time is much higher than for a hard money loan, conventional financing is still the preferred method of funding for most real estate transactions.
Aside from conventional financing, here are some other, more creative ideas:
Home equity loans: As you build equity in your personal residence, you have the opportunity to borrow against it, which allows you to leverage your home equity as collateral to take out a loan.
The major advantage of a home equity loan is the lower interest rates. Also, you have the flexibility of using the money to expand your portfolio of investment property without the hassles of taking out a conventional loan.
Seller financing: Still one of the best soft money solutions for real estate funding, seller financing offers distinct advantages over conventional sources:
- Quicker closings
- More flexible terms
- Fewer hurdles to overcome than with traditional financing
Where to find hard money lenders
Hard money lenders are sometimes individual investors who already own several properties themselves. They often have extensive real estate experience and want to branch out into other areas such as finance.
There are also a wide variety of companies and small banks that specialize in making short term loans to real estate investors. These specialized lenders charge higher interest rates but offer faster funding turn-around times.
Whether you choose an individual, small bank, or lending company, each one has different requirements for their lending criteria:
- Minimum credit score
- Asset value
- Loan to value (LTV)
- Your experience as an investor
You can find hard money lenders by doing the following:
- Do an online search for “hard money lenders”
- Join a local real estate club
- Search websites such as Facebook and Linkedin
- Establish a working relationship with a real estate agent in your area
Soft Money vs Hard Money–the bottom line
Finding new capital for your next real estate deal can be a challenge. But with patience and persistence and a good bit of research on your part, your funding goals can be realized.