The first struggle that beginner real estate investors experience when buying rental properties is financing. However, there are plenty of financial options that beginner real estate investors may apply to, such as a bank mortgage or a family loan. In this blog we will focus on a specific type of loan which is hard money loans for rental property.
Related: Real Estate Investing for Beginners: Methods of Financing Rental Property
The majority of experts state that beginner real estate investors should avoid hard money loans for rental property. Nevertheless, we will tell you when it is actually a good idea to take hard money loans for rental property. Are you willing to learn more about the topic? Keep on reading to find out all the tips and tricks we have to give you.
#1 Mortgage vs. Hard Money Loans for Rental Property
Buying rental properties is not cheap, and most real estate investors simply cannot afford paying huge amounts of money at a time. Due to this fact, investors apply for a mortgage loan. Basically, you can choose between a local and a national bank when considering applying for a mortgage. Depending on the type of bank you go to, you will be charged with different mortgage rates and down payments. However, you need to know that hard money lenders for rental properties charge higher rates in comparison to banks. Moreover, the path from applying for a mortgage and actually receiving the money is not as fast as you wish. So, when you deal with the bank, get ready that your credit history, bank statements, and everything bank related is going to be checked. Any small concern may leave you without the so desired mortgage. Consequently, you may not be able to start making money with investing in rental properties. If you were to be approved for a mortgage, it may take weeks or even months before you get the money. Usually, banks prefer if you to put at least 20% of the property price for a down payment. If the down payment is lower than 20%, you will often have to buy a mortgage insurance. In contrast, when you apply for hard money loans for rental property, you may receive the full amount without any down payment.
Related: Is Mortgage the Best Way to Finance Rental Property?
#2 Private Money Lenders vs. Hard Money Loans for Rental Property
Private money lenders are basically your relatives or close friends who are willing to help you out with financing rental properties. The main difference between hard money lenders for rental properties and private money lenders is that private money lenders do not have the professional knowledge about financing rental properties. Therefore, they would lend you money on the basis of trust. Meanwhile, hard money lenders for rental properties are professionals in lending money to investors who are planning to invest in real estate only. Thus, you need to get ready because there is going to be some paperwork to do before you start making money with a property purchase. Even though loans from private money lenders sound more attractive, compared to hard money loans for rental property due to the better conditions, hard money loans are easier to find.
Related: Buying an Investment Property: Where Do You Find the Money to Do That?
#3 Finding Hard Money Lenders for Rental Properties
The first thing you need to do in order to borrow money is to find investors and connect with them. So, what you need to do is to locate money lenders in your area based on collateral. Local real estate agents can help you out with searching for opportunities as they are a good source for contacts. After you have the name and the address of the lender, you can discuss your needs as well as details about the procedures. Moreover, you will be able to establish and develop a relationship so all the paperwork and other operation flows easier and faster.
#4 When Should You Actually Consider Hard Money Loans for Rental Property a Good Idea?
Hard money loans might sound too expensive for you for various reasons, for example, high rates, some of which might be double the rates for mortgages. Therefore, you need to carefully consider your financing method when buying rental properties. However, there are several reasons why hard money loans for rental property are a good idea:
- You Get a Fast Process
You will be directly communicating with one lender or a group of hard money lenders for rental properties. This has its benefits. There would not be many steps to proceed with as when you apply for a loan at the bank. Moreover, hard money lenders will not pay attention to your credit history or how much debt you have. One thing you should know when buying rental properties with a hard money loan is that the property that you own is the asset that is backing the loan. Additionally, hard money lenders are only interested in the value of the property. Furthermore, the relationship you establish with the lender is of key importance. The speed of getting the money depends on what your relationship with that person is. Typically, you can expect the loan in a few days or weeks. In comparison, a traditional mortgage loan might take from one to three months.
- You Are Able to Borrow More
As previously described, banks prefer when you put at least 20% of the property price as a down payment. This is their security threshold, and after meeting this expectation, you are able to get better mortgage terms. It is a good idea to contact a lender when you found the perfect location and property, and financing is the only thing stopping you from investing in it and start making money with real estate. By taking a hard money loan, you would not be obliged to pay a down payment. Hard money lenders may be willing to lend you up to 100% of the purchased price. This is extremely helpful if you need to take a fast decision, concerning your real estate investing business and ways to expand your real estate investment portfolio.
- You Get a Starting Point
Hard money loans do not suit every real estate investor, or every type of real estate investment. However, hard money loans could be a great starting point which will help you to expand your real estate investment portfolio. When you are new to the real estate investing business, financing rental properties is almost an impossible task. In such cases, hard money loans allow you to purchase a real estate property with almost no money saved in advance. There is another step after you have been established as a succeeding real estate investor. This step is to secure a line of credit with a lower interest rate instead of using hard money loan.
Visit Mashvisor right away to find out how to expand your real estate investment portfolio and be able to pay off your mortgage, hard money loans for rental property, and any other type of loans you take with an ease.