Real estate investors like you are always on the hunt for the best real estate investments. During this hunt, financing investment properties is a concept faced by professional and beginner real estate investors alike.
When buying an investment property, it is typical to brainstorm how you plan on financing a rental property. Although it would be convenient to have good money on the side to finance the income property, that is rarely the case.
In hopes of covering the costs that come with buying an investment property, real estate investors look to loans. Hard money loans in specific can be used to buy a rental property. Hard money loans do require a bit more investigation and diligent decision making.
Now, we plan to provide you with what you need to know about hard money loans and hard money lenders.
What are Hard Money Loans?
Hard money loans are short-term loans secured by real estate. These loans are backed by the value of the investment property rather than the ‘creditworthiness’ of the borrower. These loans have higher interest rates than traditional loans, and terms usually last around 12 months. Hard money loans are funded by private money lenders usually called hard money lenders.
When to Consider Hard Money Loans
There are a couple of situations that will make you look into taking a hard money loan. Here is a small list of when hard money loans are used:
- Turnaround situations
- Short-term financing
- Borrowers that have poor credit. Substantial equity in your property usually makes up for this. Don’t worry, we will mention what hard money lenders are looking for in a borrower down the line.
Who Are Hard Money Lenders?
Hard money lenders are private money lenders that give loans to real estate investors secured by one or more properties. Although hard money lenders charge higher rates and fees than banks, they move much more quickly. Hard money lenders focus mainly on the collateral for the loan (the property), and less on the borrower’s financial status and credit score. That is why we nickname them “asset-based lenders.”
There are different types of hard money lenders we will briefly mention. One type is wealthy individuals who take part in real estate and provide loans on the side for some extra cash. The second type is funds that are established to make these types of loans.
The third type of hard money lenders is mortgage brokers with a number of high net worth clients who look to invest in loans. With this type, the actual hard money lender is the high net worth individual, and your contact is the broker who arranges the loans.
Who the best hard money lenders are is a question that arises, and the answer goes back to you. It really all depends on your personal situation and how you prefer to go about it. Think, think, think!
How to Find Hard Money Lenders
Luckily, they are not hiding in a deep abyss in the middle of nowhere. How to get a hold of these hard money lenders is not too complicated. You can use the good old internet, and realistically, this is the way you will likely go about finding them. You can also ask other real estate investors you respect what hard money lenders they have used themselves.
Attending real estate events and asking individuals you meet about reputable private money lenders is a smart move. Lastly, you can try asking affluent individuals you know have an interest in real estate investment. Chances are they could be interested in providing a loan or know someone who would be.
How Hard Money Lenders Decide Whether to Provide a Loan
Although hard money lenders differ from one another, they all tend to focus on specific concepts. First, they look at aspects of the actual borrower such as:
- Deliverability of the loan
- Risk of loss based on the loan amount/underlying asset value
- Borrower strength
- Business plan of the borrower
- How the borrower is planning to repay the loan
Then, hard money lenders will look at aspects of the property itself. Most of the time, hard money lenders will overlook a borrower’s imperfect credit, but not an imperfect property. Characteristics of the property studied can include:
- How much is the property actually worth right now
- Whether or not the property will need to be improved, and how much it will be worth after improvement
- How easy would foreclosing the property be (just in case the borrower defaults on the loan)
- How liquid is the actual market? If the borrower decided to foreclose or sell the property, how long would it take?
The best hard money lenders will use Mashvisor analytics and tools, like an Airbnb calculator, to evaluate the property you are putting forth. Mashvisor is able to provide you with the investment property analysis both you and your money lender need. If you want to be on the top of your game, use Mashvisor’s product in order to evaluate the property to get an idea of what you and your lender can expect.
Giving you the rental income, occupancy rate, cash on cash return, and predicted return on investment numbers, Mashvisor is here for both you and the private money lender of your choice. With Mashvisor, you will be one step closer to closing the income property deal.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
Although you and the property do not have to check every tick on the list, the more checks, the better. You’re more likely to have your case considered by hard money lenders if you and the property are able to live up to the set standards.
Just How Much Money is Involved
How much money hard money lenders are able to bring to the table is based on the subject property. The property can be one you, the borrower, already owns and wants to use as collateral or one you wish to acquire. Most hard money lenders are set to get paid interest and have their capital returned at or before the loan matures.
As we mentioned, most hard money lenders will try to focus on a specific type of loan they feel comfortable with. For example, some private money lenders will not give more than 65% of a property’s as-is value. Lenders that charge higher rates have no problem lending at 75%.
Few hard money lenders are lending to acquire properties at attractive prices. The majority of the time, hard money lenders “loan to own.” Keep that in mind when considering hard money loans.
Main Reasons Hard Money Lenders will Turn Down a Loan
There is always the possibility of being rejected a loan. Usually, the reasons hard money lenders are not interested in the loan are:
- The loan falls outside lender’s agreed lending parameters
- The lender does not wish to lend money to a particular borrower (remember the borrower checklist we mentioned earlier.)
- The lender’s capital is not sufficient to make the loan at the specific time it needs to be funded
Do not get discouraged if you find yourself getting rejected for a loan. You will have your ups and downs when buying an investment property. If you fall while financing a rental property, dust yourself off and get right back up.
Pitfalls of Working with Hard Money Lenders
It is always a good idea to understand what you are getting yourself into when considering hard money loans. You want to be on the lookout for the best hard money lenders, but even the best have their cons.
One pitfall is working with a private lender that fails to perform or changes the terms of the loan after it is too late for the borrower to find an alternative.
Some have been known to even compete with their borrowers. They do this by making backup offers to purchase properties that clients have put under contract. This way, hard money lenders are able to benefit if the borrower is not able to close.
These practices are deceitful and unethical, I know. Unless there is an explicit agreement to the contrary, they are all probably considered legal. Be aware when dealing with hard money lenders. Keep in mind that not all the apples on the tree are bad just because there are a few rotten ones. Take caution and work with reputable hard money lenders.
Talking It All Into Consideration: Where to Go from Here
Take this information and digest it. Have it for breakfast. For lunch, dinner, dessert, even a snack in between. Do not just let these important points dust-up and collect spider webs on the shelf. Spiders aren’t nice. No one likes spiders.
Everyone in the real estate world does, however, like to find the best real estate investments! Do not be afraid to explore different ways of financing a rental property, even it is considered slightly risky such as hard money loans.
Real estate investing in itself has a risk, but you are a risk taker. If you are not, become one. Mashvisor’s investment property analysis combined with your ability to take those risks is what will lead you to success in this jeopardous real estate business. Do it.
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