Hard money is a tool like any finance product. It is best used to close quickly and minimize out of pocket expense at closing. It is not ideal for a long-term project or a lengthy term. Newer investors typically utilize it as they build their capital stack. Previous contributors are correct in saying cash is best for avoiding debt service expense and other lending fees. Hard money is simply something to consider utilizing if the situation calls for it.
An example would be buying a rental property. I'll use round numbers to make it easy.
Purchase price - $50,000
Required renovation - $25,000
After repair value - $100,000
Utilizing hard money (our product at least) would allow an investor to finance $75,000 or 100% of cost in this example. They would come to the closing table with only closing costs on the front end. Let's assume all-in those costs are 6% of the loan amount or $4,500. That would include points, fees, title, insurance, pre-paids, etc.
Let's assume this renovation took two months. Debt service at 12% interest only would be $1,500 ($750 per month).
Once the renovation was completed the borrower would refinance with a long-term lender. The closing costs on that transaction would likely be rolled into the loan. Let's say the final LTV is 80%.
By utilizing hard money, the borrower just bought a rental property, renovated it, and is sitting on 20% equity. It required approx $6,000 out of pocket. This is an example of how hard money might be helpful.
