There are several ways to finance your rental property investment. If you’ve heard the phrase “hard money loan,” your mind may immediately think of a quick business deal. Well, that’s not too far off. Hard money loans offer fast financing for investors who need to borrow money. Read along as we go over hard money loans, how they work, and the pros and cons.
What are Hard Money Loans?
Hard money loans are short-term, non-conforming loans that don’t come from traditional lenders. Instead, these non-conventional loans come from people or private companies that accept investment properties or assets as collateral.
Generally, those that offer hard money loans are also investors, so they understand the process like the back of their hands. Some borrowers may turn to hard money loans if denied a traditional loan or mortgage. On the other hand, some investors explore money loans if they need the cash quickly and don’t have time to go through the lengthy process of getting approved for a traditional loan.
Like a traditional mortgage, hard money loans are secured and guaranteed by the purchased property. Essentially, the borrower receives funds in exchange for the physical property as collateral. Hard money lenders generally expect to receive the full loan amount, plus interest, within one to five years.
That said, interest rates for hard money loans are usually a bit higher due to the shorter term and higher risk. So next, let’s go over how they work and how to use them.
How Do They Work?
As stated above, hard money loans are used similarly to a traditional loan but are leveraged with an asset or investment. In addition, while traditional mortgage loans require proof that you’ll pay the debt back promptly, hard money loans do not.
Instead of coming from a traditional mortgage lender, hard money loans come from individuals who lend funds depending on the collateral you’re exploiting.
Hard money loans are less concerned with your credit score and income. Instead, if you’re unable to pay back the loan for any reason, lenders can recoup the investment by selling the collateral. As such, the collateral value used to secure the loan is most important to hard money lenders.
Hard money loans aren’t right for everyone. After all, they have high-interest rates and aren’t meant to be held onto for long periods of time. Next, let’s go over who may benefit from this financing method.
Who are They Right For?
Hard money loans aren’t the best financing option for everyone. For instance, certain conditions or prerequisites exist to meet before a lender goes through with the deal. For example, most lenders will look at the borrower’s history and the property value they’re looking to finance. They may also require a larger down payment to secure the loan.
Generally, untraditional loans are popular among developers, rehabbers, and investors who want to fix and flip a property. After all, they are quick, and it’s easy to obtain the money you need to invest in a property.
Investors need to recognize that interest rates are higher for a hard money loan than they would be for a traditional loan. However, the higher rate is justifiable for most investors since they can obtain the money much quicker.
Additionally, since the loan doesn’t focus on creditworthiness or certain credentials, it can be much easier to obtain for investors that don’t have a great credit history. Overall, hard money loans are right for investors who want a simple, quick way to obtain funds.
What Do People Use Hard Money Loans For?
Generally, hard money loans are used by investors looking to get financing quickly. However, there are several reasons people may seek out unconventional loans. Here are some of the most common scenarios.
- Fixing and Flipping a Home
- Purchasing Investment Properties
- Buying Commercial Property
Fixing and Flipping a Home
Some investors want to make money quickly by purchasing a fixer-upper, making valuable repairs, and flipping the home for profit. Some of these investors utilize hard money loans as a quick borrowing method that investors can pay back faster than a traditional mortgage.
Purchasing Investment Properties
Investors who want to buy rental properties but don’t qualify for traditional financing may seek a hard money loan. For instance, those with poor credit history, lack of credentials, or a need for more money than a conventional lender will allow can benefit from a hard money loan.
Buying Commercial Property
Business owners can use hard money loans to buy commercial real estate if they can’t obtain traditional financing. Some properties don’t qualify for traditional financing, so alternative financing methods can be useful in this scenario. Additionally, some traditional loan limits don’t cover the whole cost of a commercial property, so hard money loans can help investors that need extra financing.
Benefits and Drawbacks of Hard Money Loans to Consider
Like any investment method, hard money loans have some benefits and drawbacks. Before considering a hard money loan, it’s crucial to do your research and make an educated decision. Here are some of the pros and cons of this borrowing method.
Pros of Hard Money Loans
- Quick transactions in a competitive market
- Creditworthiness doesn’t really matter
- A typical large down payment isn’t necessary
- It can be used as a bridge loan until long-term financing is secured
Cons of Hard Money Loans
While there are many advantages, there are also some disadvantages. Here are some of the cons.
- Higher interest rates
- More expenses, like loan origination fees
- Required rehab program
- The property deed is collateral
Luckily, no matter how you finance your rental property, there are several ways to manage it. Washington DC property management can ensure your property is always managed and you get the best ROI.
How to Find the Ideal Hard Money Lender
Before following through with a hard money loan, it’s important to find an ideal lender. After all, not every lender operates the same. In addition, lenders will differ in terms of price and quality, so it’s important to find the proper lender for your situation.
Look for a lender that will provide quick turnarounds, fair rates, and favorable conditions that allow you to invest while maintaining cash flow. Most loans are backed by private investors who understand the real estate market since they also want to profit from their investments.
Once you’ve found a lender, ensure you have the proper documentation. Although most hard money lenders don’t require the same information as traditional lenders, they’ll still want some information about you and the property you’re looking to buy. So, make sure you have evidence of your assets, tax records, and property documents in case they want to see some paperwork.
Protect Your Investment With Property Management
No matter how you finance your investment property, managing and maintaining it properly is crucial. If you don’t have time to keep up with each of your rental properties, consider hiring property management to ensure you’re providing your tenants with the best experience possible.
Bay Property Management Group offers comprehensive rental management services to help busy investors get the most from their rental business. We help with tenant screening, maintenance, rent collection, and more. Contact BMG today if you need management services in Baltimore, Philadelphia, Northern Virginia, and Washington DC.