The Role of Hard Money Lenders in Fueling Real Estate Development

The concept of hard money dates back to the Great Depression in the United States. The collapse of the banking industry destroyed consumer confidence and caused widespread panic, so individuals began withdrawing money from bank accounts and keeping it at home, which ultimately led to a mass reduction in the amount of money in circulation.

This resulted in people finding they were unable to access additional cash when they needed it. Lenders sought a solution to help resolve this by offering loans that utilized real estate as collateral. Due to the risky nature of this type of loan, higher interest rates were charged, but with no other way to get quick cash, many borrowers had no alternative than to take out hard money loans.

Since then, we have seen hard money lending hit some highs and lows in terms of reputation. In the 1950s, for example, private short-term debt was vital to the world of real estate development. It became somewhat of a “last resort” option for commercial property owners who were looking for capital against the equity of their holdings.

By the 1990s, a major turn in the commercial real estate market resulted in an unprecedented number of banks experiencing considerable failures and massive losses. Due to this, private lenders became a widely popular alternative when it came to real estate financing.

This started the rise of hard money lending as private lending became very commonplace by 2010.

So, why did private lending suddenly develop a better reputation? It was largely due to real estate borrowers becoming increasingly frustrated with the Dodd-Frank Act and the hoops they had to jump through. Investors began looking for alternative lending solutions and quickly realized that the hard money lenders they had thought of as “back-alley operators” had become private lenders that were now a viable, respectable alternative. Private lenders developed a new reputation for being established, aboveboard providers of lending solutions.

Investors also discovered that private lending offers various perks that traditional banks cannot provide, such as better loan speed and execution, unique loan terms that include rehab costs, and the ability to provide more leverage.

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