Using Hard Money Loans for Real Estate Investments
Taking part in real estate investing is an excellent way to add diversity to your portfolio and build wealth. While some investors choose to invest passively using crowdfunding and real estate investment trusts, others prefer to own the entire property.
Investors and house flippers often turn to hard money loans for funding their projects. The loans are perfect for several specific investment deals. However, before deciding if a private loan is the type of financing you should use, it’s always best to first know all the facts.
This article will help you understand the importance of hard money loans for real estate investors. You will also learn why and when it makes sense to use them.
What are Hard Money Loans
A hard money loan is a financing option real estate investors often use. Known as asset-based loans, they are mostly short-term and always offered by private hard money lenders. Traditional institutions don’t provide anything that resembles a hard money loan. It’s a financing option available only through individual investors or private lenders and organizations.
Moreover, hard money loans were initially created by investors for investors. Real estate developers, investors, and house flippers use them most often. They are a quick and easy way to get funds for a real estate purchase. Unlike traditional loan requirements, hard money uses the estate as collateral, so there is less documentation.
The entire process is quicker compared to bank loans. Hard money lenders don’t focus on the borrower’s creditworthiness. Instead, they want to know the property’s value and the borrower’s plans. Most importantly, they are interested in the expected return of investment. Instead of waiting for a month or two for loan approval, hard money borrowers usually get their funds in weeks.
The Purpose of Hard Money Loans
The primary purpose of private loans is to get funds for buying a property to develop further or renovate and finally sell or rent for profit. While they aren’t cash loans, the best hard money lenders allow real estate investors to get funds to purchase a property quickly.
Investors prefer private loans to traditional institutions because the process is fast, and they can easily access funds. Some lenders can finalize the entire process and release funds within several days. It’s critical for investors to access funds within weeks, sometimes even several days. Quickly accessing funds makes or breaks a deal. The market moves fast, and hard money loans allow them to secure a property before their competitors.
Additionally, the short-term nature of the loan allows investors to renovate and sell a property quickly, then move on to their next project.
However, private loans aren’t ideal for any project, and they aren’t a perfect choice for everyone. The convenience you get with a hard money loan comes with premium payment. The rates are higher than those of traditional loans. Sometimes there are additional fees and costs.
Hard Money Loan Requirements
Hard money loan requirements usually vary from lender to lender. Since private companies and individuals supply the loans, they determine their terms. It also means there is space to negotiate terms for the borrower since the requirements aren’t as rigid as traditional loans.
While they’re easy and fast to acquire for some investors, it’s essential to understand that the lenders need to know how reliable a borrower is. It’s crucial for them if you’re asking for a loan for the first time.
If you’re looking for hard money lenders for beginners, be ready to show your investment history and verify the overall property value. Additionally, the lender may require a down payment for extra security.
However, when you start doing business with a lender, you will most likely deal closely or directly with them and develop a positive relationship. After successfully handling a loan or two, each future loan application will go quicker and smoother.
Hard Money Loans Rates and Points
Fees in hard money loans are called points. Generally, they can go anywhere from 2% to 4% of the entire amount the borrower needs.
Hard money loan interest rates may vary greatly depending on specific deals and the lender’s policies. Most lenders offer loans with fixed interest rates. However, some of them will allow investors to negotiate floating rates. In most cases, hard money loans come with 10%-15% interest rates.
When it comes to hard money loans, Florida has many reliable lenders.
A hard money loan is a lucrative way to secure an investment. For real estate investors, it’s a quick way to secure financing for future projects. The interest rates may be higher than conventional loans, but the conveniences usually justify the premium price.
The most important thing to remember when looking for a private loan is to find a reputable lender with an excellent track record of past investments.