There are many ways to acquire financing when buying an investment property. Hard money loans for real estate are one way of financing rental properties instead of going through institutional lending.
What Are Hard Money Loans?
Hard money loans are investment property loans that come from companies or individual investors who lend money based on the property you are using as collateral.
Hard money loans for real estate are normally short-term loans that last from one to five years. They are often used by investors to finance large projects such as multifamily investments. They usually have higher interest rates than those of traditional loans, making them expensive to keep for long.
Most investment property financing options require proof that you are able to repay them. Mortgage lenders are usually keen on your credit score and the size of your income available for loan repayment. This makes the approval for a loan with a traditional lender a very slow process. Sometimes you might not even get approved, especially if you have a poor credit score or your income is difficult to verify to the satisfaction of your lender. So hard money loans for real estate may be your only option. They are also important when loans are needed urgently and need to be expedited.
In comparison to a conventional mortgage, hard money loans for real estate have many benefits. Nevertheless, it is also important to know the drawbacks. Let us look at both the pros and cons of hard money loans.
Pros of Hard Money Loans for Real Estate Property
Hard money loans for real estate are more flexible than traditional loans. This is because they are issued by private lenders who do not use a standardized underwriting process. Hard money lenders usually evaluate each deal independently and don’t have strict policies like large corporations. Depending on the situation, the details of the terms can be tweaked. This enables the borrowers to tailor aspects of the loans, like the amount of fees and the repayment schedule.
2. Collateral comes from the property
One important benefit of hard money loans for real estate is that its collateral comes from the investment property itself. The determining factor for hard money loans is the value of the property. Property valuation is carried out and the hard money lender will lend what the investment property is worth. The value of the collateral has more importance than your financial position. Therefore, you do not have to worry about your credit score like with traditional bank loans.
Since hard money lending is mostly concerned with collateral and less with your financial position, you can get funding more quickly than traditional loans. You don’t have to go through the time-consuming process of the mortgage application. Once you build a relationship with a hard money lender, the process of acquiring funding can be completed quickly. This gives you the ability to close deals that may be impossible otherwise. It decreases the likelihood of losing out on a good investment property. This is particularly significant in hot real estate markets where multiple offers are made on the same property.
Cons of Hard Money Loans for Real Estate Property
1. High costs
Hard money loans for real estate are expensive. All the fees, such as loan-servicing fees and closing costs, make it cost more than conventional mortgage loans. Also, expect to pay higher interest rates on these loans. Although hard money loans for real estate are convenient, the added costs are something that borrowers should consider. To have a good return on investment, use the right investment tools, like an Airbnb calculator, so things work according to plan during the financing stage.
2. Repayment period is short
Hard money loans for real estate have a shorter repayment period relative to traditional mortgage loans. This is because hard money loans are short-term lending instruments. They are aimed at investors who plan on getting the investment property back on the market as soon as possible.
It is important for a real estate investor to know how soon the investment property will produce a profit so as to make sure the repayment is timely. If the loan is not paid back on time, there could be an increase in the already high interest rate.
3. Risk of losing investment property
The security for the hard money loan is the physical investment property. If anything goes wrong and you are not able to pay off the loan, you risk losing the property. Lenders will have to sell your property so as to recover the money they lent you.
Who Needs Hard Money Loans for Real Estate?
Different real estate investment strategies may need different financing methods. Hard money loans are great for short-term investments where money is needed fast. For instance, fix-and-flip investors may need short-term loans to quickly renovate and increase the value of an investment property before selling it for a profit, usually within a year. Some real estate investors turn to hard money loans as a bridge loan between the purchase of an investment property and permanent financing.
To Sum It All Up…
Hard money lenders usually lend money based on the collateral securing the loan. They are less concerned about your credit score and your ability to repay. Even though hard money loans for real estate are usually expensive, they may be suitable for certain borrowers who may not get traditional funding when needed. These loans usually close more quickly compared to traditional financing, often in a matter of days. This is particularly important in a hot seller’s market where traditional funding may take too long to close.
If you are looking to acquire a short-term investment property but can’t get a conventional loan, then hard money loans for real estate are a great option. To borrow hard money loans, you will need to get connected with investors who can lend money on collateral. You can find them all over the country from sources like real estate investor groups and local real estate agents.
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