Financing real estate projects is becoming easier and more diversified, given the power of the Internet, the rise of crowdfunding and hard money lending. Both forms of financing have advantages, making each appropriate based on the financial needs of borrowers. These advantages become clearer, by examining both types of financing in detail.
Real estate crowdfunding involves soliciting funds from accredited investors via the Internet for various projects, such as new construction or rehabilitation. Accredited investors have at least a $1 million net worth and meet income requirements, to be considered eligible to participate in the financing process. While the criteria for individual crowdfunding campaigns is different, the general concept is the same. Once funds are raised, borrowers can use the monies to start building or complete their renovation project.
The debt the borrower takes on can be secured or unsecured, meaning the loan might be secured with collateral such as real estate. Finding lenders via the crowdfunding method is effective and can make cash flow problems disappear. However, there is inherent risk for lenders, if borrowers don’t actually follow through with their project plans. As the Internet continues to evolve, so too will crowdfunding and all of its applications.
Hard Money Lending
In contrast, hard money lending involves a company offering a loan to a borrower, while using the borrower’s real estate as collateral for the loan. Obtaining a hard money loan is typically very fast and does not come with the qualification criteria associated with traditional bank loans. Rather, hard money lenders are focused on the value of the collateral, the advance rate on the loan and the interest rate. An advance rate is based on the value of the collateral; borrowers are only advanced funds amounting to a percentage of the total collateral value, such as 70 percent.
One of the many advantages to this type of loan is that bad credit histories typically do not factor into the lending process. This means that borrowers strapped for cash or that are in financial difficulty can secure a loan and keep their business afloat, during hard times. Borrowers have to provide information on the collateral, along with some other basic information, to complete the lending process.
Crowdfunding has a large reach and can help developers raise capital quickly and effectively. While hard money loans can enhance a borrower’s cash flow fast, using the borrower’s real estate as collateral. Both types of financing can be used to accomplish financial objectives and make money.
Joseph D. is a content writer with corporate accounting and financial experience. His work has been featured on: Chron.com, AZ Central Small Business, TheNest.com, Synonym.com Money, Zacks.com, eHow Business & Personal Finance, Opposing Views Money, Yahoo Finance and Yahoo News