As you may know, getting approved for a bank loan is a tedious and time consuming process. The protocol to take out a bank loan for real estate investing in the traditional sense might be frustrating to say the least, especially if your credit score is not up to par. If you do not have the capital means to buy real estate, borrowing money might be your only option. With this said, there are different financing options you can consider (aside from traditional mortgage lenders) to buy rental properties and kick start your real estate business on a good note. One feasible option is borrowing from hard money lenders for rental properties as opposed to your ‘friendly’ neighborhood bank.
What Is a Hard Money Loan?
To put it in the simplest terms, hard money lenders for rental properties are individuals and/or investors who lend money using the rental property as collateral. In this way, they can be rest assured that they will get their money back one way or another.
And for real estate investors who run to hard money lenders for rental properties, they do so when:
- A real estate investor is in dire need or in a hurry to get a loan.
- A real estate investor was not approved for a bank loan.
Most bank loans require proof you can repay them in a timely manner taken into account your credit score and your income. If you have good credit history and a stable income, then getting approved for a bank loan for real estate investing should not be an issue. But as previously mentioned, getting that bank loan will take time as the process is very slow.
On the flip side, getting a hard money loan is a much faster process, and hard money lenders are less concerned with your ability to repay the loan and more concerned with the rental property used for collateral. If you cannot commit to repaying the hard money loan, the lender will simply take the collateral and sell it for a fat profit. In a nutshell, hard money lenders for rental properties value the collateral more than your financial position.
A hard money loan is short term compared to the traditional mortgage loan, lasting between 1-5 years. And it is in the borrower’s best interest that these loans are for shorter duration because the interest rates are generally higher and more costly than your traditional mortgage loan.
The Advantages of a Hard Money Loan
1. You can get a hard money loan much faster
As previously mentioned, getting a hard money loan is a much faster operation than going to your bank. Hard money lenders for rental properties put less emphasis on verifying your income and reviewing bank statements, and focus more on the collateral and ARP (After Repair Value).
2. A hard money loan poses less restrictions and has more flexible terms
Because hard money lenders guarantee their returns either way, they don’t use a standardized underwriting process, and, instead, they evaluate each deal individually and are more open to negotiating the terms of the hard money agreement.
3. You have a better chance of getting approved for a hard money loan
The flexibility and speed of the hard money loan make it easier for borrowers to get approved and hit the road running. The most important factor for hard money lenders is the collateral. Hard money lenders for rental properties will lend as much as the property is worth.
The Disadvantages of a Hard Money Loan
1. Hard money loans are expensive
This goes without saying, the downside of a hard money loan is the hefty interest rate borrowers are obliged to repay. Hard money loans are more expensive than your traditional mortgage loans because there is higher risk that the borrower may not be able to repay the loan in a shorter time period.
2. Finding the right person to lend you hard money is no easy task
To find the best hard money lenders for rental properties, you must build your networks and get connected with investors willing to lend you money based on collateral. Start in your area by reaching out to local real estate agents and real estate investor groups and discussing potential partnerships.
What Is the Best Real Estate Strategy for a Hard Money Loan?
The best real estate strategy for a hard money loan is the fix and flip. Fix and flip investors gravitate towards hard money lenders for rental properties because they own a property just long enough to increase its value and sell it for a profit. It usually takes less than a year to fix and flip a rental property and in turn sell it and repay the hard money loan. Financing a buy and hold rental property via a hard money loan is not a good idea and might be one that will break the bank. A traditional bank loan is your best bet when it comes to financing a rental property in the long term.
Where to Find Hard Money Lenders for Rental Properties?
To find the right lender with the right financials:
- Search online for a hard money lender directory for any state in mind
- Attend local real estate investor meetups in your area
- Ask your real estate agent if he/she knows of any hard money lenders for rental properties
Sometimes, getting referrals from family and friends is also a good option. Ask around and build your real estate investment network to find the best stakeholders to build your real estate business for profit.
The best aspect of real estate investing is the fact that you don’t need your own money and capital to buy real estate. On the contrary, it is a much better strategy to take out a loan and borrow money to accumulate equity and build wealth in real estate investing than paying out of your own pocket. Choosing hard money lenders for rental properties can be an ideal option for you, given that it is aligned with your business plan and real estate investment strategy.
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