Investing in real estate is a tried-and-true path to financial success, and hard money loans are a goldmine for landlords trying to expand and grow their portfolios. As a real estate investor, you always look for new ways to fund your investments.
Unfortunately, you may not consider hard money loans an option due to several common misconceptions. While not as well-known as typical bank loans, hard money loans can be quite helpful to investors.
Unlike conventional bank loans, the property acts as security for private investors or organizations funding the hard money loans, providing a means to close funding gaps, particularly in situations requiring immediate financing.
Read along as this post explains how hard money loans can be a key to unlocking your real estate investment potential.
Types of Hard Money Loans
Bridge
As the name implies, investors have access to bridge loans that span the gap between two transactions, such as purchasing and selling or refinancing the same property. The bridging industry has developed dramatically during the last decade.
Today, businesses and individuals use bridge loans to seek immediate approval for real estate financing. When you manage bridge loans well, you can earn money quickly. Typically, it takes around a week to process this kind of loan.
Those who manage rental properties or fix and flip them also benefit from bridge loans. House flipping is gradually becoming more popular due to the prospect of high returns, which has also increased the use of bridge loans.
Transactional
The transactional loan provides investors with short-term capital. They are a quick and simple alternative to traditional loans. The entire process of obtaining this loan is quick, allowing investors to secure a loan in as little as one business day. These loans are intended to give investors short-term capital, allowing them to close deals swiftly.
Transactional loans are not the perfect option for every situation, but they are sometimes suitable. These loans are most appropriate for investors who have discovered buyers ready to pay significantly more for a property than its price. In this case, an investor may obtain a transactional loan and then sell the property to the buyer.
The investor will then pay off the loan with the revenues from the sale, keeping the difference as profit. There’s also a quick completion on these transactions. Find out more about this type of loan by researching a competitive hard money lender that fits with your investment goals.
Rental
It might be difficult for you as an investor to estimate the cost of upgrading a property. When you need quick access and flexibility, rental hard money loans are a fantastic option. This is especially useful if you need emergency finances or another resource while investing in a project.
Renovating an old property can be more expensive than expected. However, evaluating the challenges new hard money loan borrowers face is important before evaluating the property value.
A rental loan allows you to purchase and renovate a property that tenants will eventually rent. You can then use the loan to purchase a single-family property, a multifamily home, or an investment property. Most lenders want rental revenue to be at least 120% of the monthly mortgage payment and possibly as high as 140%, depending on the lending parameters.
Commercial
Commercial loans are a type of loan that provides capital from private lenders to borrowers who need it for a commercial project. For example, borrowers may require a commercial loan to repair an existing commercial property before refinancing to a traditional mortgage.
Commercial loan deals allow you to invest in a project without going through the hassle of a conventional bank loan, which can be more difficult for people who have never owned commercial property.
Eligibility Requirements of Hard Money Loans
While the specifics might vary from lender to lender, most hard money lenders will look out for certain criteria before approving a borrower’s application. Therefore, these are just a few of the eligibility requirements to keep in mind when considering hard money loans.
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Down Payment
A hard money loan amount often relies on the property’s projected value once the borrower’s project is completed. In the case of a real estate development or renovation project, the value of the property at the time of purchase, known as the “as-is value,” may not be sufficient to cover the lender’s losses in the case of default before completing the project.
For example, if a hard money lender loans $600,000 on a property worth $500,000 and the borrower defaults, the lender will lose $100,000 or more.
So, when it comes to hard money loan application requirements, your down payment is the most important factor lenders consider when deciding whether to approve your application. Hard money lenders typically request a down payment on their loans. Your down payment will serve as collateral for your loan, and hard money loan applications with significant down payments are more likely to be approved.
Proof of Income
Although a hard money loan requires less paperwork than a standard loan, you must still provide proof of income. Your lender requires verifiable confirmation that you can make your monthly loan payments. Your proof of income should include the average weekly hours you work, your annual pay, and any passive income such as capital gains or interest.
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Exit Strategy
Your exit strategy is one of the most essential requirements for obtaining a hard money loan. Your exit strategy informs the lender how you intend to repay your hard money loan. Because hard money loans are typically short-term, lenders will require you to have an exit strategy.
Some exit strategies include refinancing your hard money loan to a conventional loan, selling the property off, or liquidating other assets to pay off the hard money loan. The most popular strategy is to sell or refinance the property within your loan period.
Final Thought
Hard money loans are a major financing option for real estate investors, distinguished by the speed, flexibility, and accessibility of the loan. While there are some drawbacks, such as higher fees and shorter terms, strategic use of hard money loans can open up enormous potential in the real estate market.
As with any financial deal, investors considering hard money loans for their real estate projects must conduct extensive research and fully understand the conditions of the loan.