Real estate is a lucrative investment. It’s an excellent way to diversify your portfolio while ensuring a relatively high return on investment (ROI). However, investing in real estate — especially commercial properties — usually involves a substantial upfront payment. Hence, if you don’t have the capital, taking out a loan is the ideal option.
Looking for a way to fund your next real estate investment? You might want to take out a hard money loan. In this article, we’ll go over the basics of buying an investment property using a hard money loan.b
What is a hard money loan?
A hard money loan is a loan from private individuals and private lenders. Unlike other types of loans, it is not issued by a financial institution. Instead, non-traditional lenders accept tangible assets such as real estate as collateral.
Hard money loans are often the “last resort” for property investors whose mortgage applications were not approved. It is also an option for those that don’t have the time to go through the painstaking loan application process. This is because hard money loans have less stringent requirements. It isn’t dependent on the property investor’s creditworthiness, but instead, on the value of the property they intend to purchase.
House flippers often obtain hard money loans because of their speedy turnaround. Some property investors buy low-cost properties such as cheap apartments, spruce them up, and then sell them as soon as possible. If you’ve ever flipped a house, you’re likely aware that financing this type of project is nearly impossible. That’s why house flippers choose hard money loans over traditional loans.
Plus, unlike typical loans that take weeks — even months — to process, a hard money loan can be processed within a week. It’s the ideal option for property investors who are planning on completing a project in a matter of days.
How do hard money loans work?
Traditional loans work like this — you provide proof that you can pay it off, they review your creditworthiness, and then they decide if they’re able to approve your loan. On the other hand, hard money loans don’t contemplate your credit score, savings, and so on. Non-traditional lenders aren’t worried that you won’t be able to repay the loan, because your property acts as collateral. If you can’t pay it off, they’ll simply take your collateral.
The upside to hard money loans is that they’re short-term loans. They typically last one to three years, but these terms can be extended depending on your private lender. It’s important to note, though, that hard money loans have high interest rates, so you’ll want to pay it off as soon as possible. The interest rate for hard money loans in the U.S. ranges from 7.5% to 15%.
Who are non-traditional lenders?
Non-traditional lenders are private individuals or private companies that don’t follow the traditional regulations set by financial institutions. They are less strict, but they also have the freedom to enforce their own requirements such as debt-to-income ratios, loan to value (LTV), and so on.
There are several ways to find a hard money lender in South Florida. For starters, you can Google “hard money lender” along with the name of your city or state. You can also ask a real estate agent or property manager who has a network of non-traditional lenders.
What are the advantages of taking out a hard money loan?
Not interested in taking out a traditional mortgage? Here are some of the advantages of taking out a hard money loan:
Applying for conventional loans can be time-consuming. Financial institutions are required to follow specific regulations on mortgage lending, which means it can take months for them to review your application. This puts investors at risk of not being able to buy a particular property, especially if the single-family home they’re eyeing is on other investors’ radars.
#2 Negotiable Terms
Unlike traditional mortgages, hard money loans offer more flexible terms. For instance, if the repayment schedule doesn’t work for you, you can request your lender to tailor it to your needs. Plus, if your property management company has a long-standing relationship with the lender, they can negotiate lower rates.
#3 Less Stringent
Under a hard money loan, the collateral is usually the property that the borrower plans to buy. However, some lenders allow a bit of leeway and will accept other assets as collateral. For instance, the collateral can be another property that you already own.
What are the disadvantages of taking out a hard money loan?
There’s a reason why hard money loans are the last resort for many property investors. Let’s look at the disadvantages of a hard money loan:
#1 High Interest Rate
There’s a price to pay for the convenience of hard money loans — their interest rates are much higher. The interest rates are usually ten percentage points higher than a traditional loan from a financial institution.
#2 Short Repayment Schedule
Since hard money loans are short-term loans, this means that investors must pay them back fast. Hence, property investors should think twice about taking out a hard money loan if they aren’t sure when (and if) their property will become profitable. There is, however, a simple solution to this — they can hire a property management company that can do the calculations for them.
#3 High Downpayment
Hard money loans usually require a downpayment of at least 25%. This is because hard money loans put the lender at risk of the borrower abandoning the project. So, before you take out a hard money loan, you may want to check if you have enough savings to cover the upfront payment.
The bottom line
Hard money loans let you stay on track with your property investment goals. They’re ideal for investors that are having a hard time getting their loans approved. However, like conventional loans, they come with risks that you should be aware of.
If you need help funding your investment property or project, give the property managers at Luxury Property Care a call. We’d be happy to help you find solutions that fit your specific needs and budget. Contact us at (561) 944 – 2992 or complete our contact form to learn more.