Given the scale of the asset-based lending market, which has grown to more than $465 billion, the increasing demand for asset-based lending assures that investors are choosing hard money loans while putting their property up as collateral.
Investing in real estate may be a profitable method to develop wealth and a good way to diversify your portfolio. You can invest passively through real estate investment trusts (REITs) and real estate crowdfunding, however, some investors prefer to own property directly.
If you don’t want to put down a large sum of money upfront to buy real estate, a hard money loan may be the way to go. While this sort of loan offers some benefits over regular finance, it also has some drawbacks. There is still a need for a capital buffer.
It is a sort of loan that is secured by an “inflexible” asset such as real estate that is referred to as a hard money loan. For real estate investors and home flippers looking for financing for a deal, a hard money loan may be the best choice for you to consider. What is a hard money loan?
What exactly is a hard money loan?
Hard money lending is a sort of lending that is frequently employed in the real estate investing industry. Asset-based loans, STABBL loans, and bridge loans are all terms used to describe hard money loans.
Short-term finance is provided by hard money loans, which are always backed by some form of collateral such as real estate. Because traditional financial institutions do not offer hard money loans, this financing service is only available via private lenders and individual investors.
Hard money loans are frequently leveraged for fix and flip or remodeling and are a preferred loan type by real estate investors and developers. Such loans can be a speedier and less complicated option to obtain an investment acquisition than conventional financing or the authorizations that are required by traditional banking.
They are also more flexible than traditional financing. The fact that these types of loans are asset-based means that they are not dependent on the borrower’s ability to repay the loan.
Using hard money loans in real estate transactions makes sense in some situations.
When taking out these types of loans, the goal is to secure assets to rehabilitate or develop them to eventually sell them for a profit. A hard money loan may be preferred over a conventional loan by an investor due to the simplicity of obtaining the funds.
Lending alternatives from financial institutions are frequently subject to lengthy approval processes that significantly burden the borrower’s ability to repay the loan. Because hard money loans are asset-based and often backed by a mortgage, the authorization process for these loans is significantly shorter.
Lenders will analyze the underlying asset and can determine a lending decision within a few days of receiving it.
The following are some of the most important recommendations for using hard money loans for real estate investments that will help you manage your money and time in a more effective manner.
1. Find the Right Lender to Get You Started.
Not every hard money lender operates in the same manner. They differ in terms of quality and price; therefore, selecting the most appropriate lender is critical. The greatest firms in the field provide quick turnarounds, quick decision times, fair rates, and conditions that allow you to invest effectively while still maintaining a positive cash flow.
They are often backed by a group of private investors that understand what you’re attempting to do because they are also looking to profit from the real estate investment market.
2. Choosing the Right Property
Hard money loans are not appropriate for all types of properties. Your lender’s principal goal is recouping the money it has loaned you and nothing else. This is why it will typically look to offer loans on properties that will provide you with opportunities to make a substantial profit in the long run.
If you are able to produce a high return on your investment property, it becomes much more probable that you will be able to afford to pay off the loan in full.
3. Make Sure You Have the Correct Documentation
The fact that hard money lenders don’t want the same amount of information as regular lenders doesn’t rule out the possibility that they will want some information about you and the property you are acquiring.
Lenders’ procedures differ from one another, but they may request an assessment of the property, evidence of your assets, tax records, or other documents.
4. Make a real-equity contribution.
Private lenders consider themselves to be partners with their borrowers as much as they are lenders. You will be required to put some of your own money into the property that you purchase as part of their partnership with you.
Many hard money lenders ask for larger down payments than would be required by a typical bank lending institution. If you want to obtain a hard money loan, you need to be prepared to put as much as 25 or 30 percent down on the property.
5. Comply with the lender’s deadlines and requirements.
One of the most significant advantages of obtaining a hard money loan is the quickness with which it may be completed. Hard money lenders can often move more rapidly and fund your loan in weeks or days rather than months, as opposed to traditional lenders.
However, in order to complete a swift closing, your lender will require you to provide the information it requires as promptly and as accurately as possible.
What are the terms of hard money in terms of points and interest rates?
Typically, hard money lenders impose a fee to the borrower in exchange for granting the loan. These fees are referred to as “points.” In most cases, the points on a hard money loan are equivalent to one percentage point of the loan’s entire value; however, they can range anywhere between 2 percent and 4 percent of the whole amount loaned.
The rate of interest on a hard money loan might vary significantly depending on the lender and the nature of the transaction. Although most lenders will issue loans with a fixed interest rate, you may be able to negotiate a floating rate in some circumstances, based on my research and experience.
Hard money loans have traditionally carried interest rates ranging from 10 percent to 15 percent, depending on the lender and the projected risk of the transaction.
What are the prerequisites for borrowers seeking hard money loans?
Because private persons and businesses provide hard money loans, the lending conditions might differ significantly from one lender to the next.
However, because the borrower frequently interacts with, and in some cases directly with, the lender, there is frequently considerably more room to negotiate terms.
Suppose this is your first time applying for a loan. In that case, you will almost certainly have a more difficult time getting accepted and may be required to provide additional information that a seasoned investor would not be required to provide.
When considering a hard money loan, most lenders will look at the borrower’s investing history and the property values for the item in issue. Most lenders will also require a down payment of 30 percent to 40 percent to secure the loan in most cases.
Hard money loans can be a great option to finance a real estate investment for various reasons. Hard money loans are popular among real estate speculators, house flippers, developers, and rehabbers since they are quick and simple to obtain funding.
While the interest rates are higher than those of a traditional loan, the higher rate is mitigated by the fact that perhaps the borrower can obtain the money much more quickly and also that the loan is focused primarily on the property being bought rather than the borrower’s personal authorization or credit history.
Buying a home is a good example of this. In your search for a hard money lender, make sure you choose a well-established organization with a lengthy and reliable track record in the business of lending.
Guest Post Bio
Grant McDonald has more than three decades of experience in the real estate industry and more than a decade in the real estate finance space. He is currently Vice President of Corporate Development at 14th Street Capital – America’s premier hard money lenders for real estate investors.