What are Hard Money Loans for Real Estate? Also known as private loans, hard money loans are unconventional financing programs that divert from the established principles of traditional lending. These loans are favored by most seasoned real estate investors and beginners because they are fast to approve, offer quick access to much-needed funds, and do not have excessive documentary requirements. All these elements allow investors to make quick deals and go after time-constrained or even unexpected real estate projects. Hard Money Loans for real estate are also the preferred financing source when investors need easy and fast funds to buy dilapidated or renovate properties for a profit.
Characteristics of Hard Money Loans:
Hard Money Lenders divert from the established financing processes favored by traditional lenders. While conventional banking norms dictate underwriting procedures based on credit rating or financial history, hard money loans for real estate tend to focus more on the potential of the presented collateral property. Listed below are other characteristics of Hard Money Loans that set them apart from bank loans.
Asset or Collateral-Based Loans
One characteristic of a hard money loan that sets it apart from conventional loans is that the borrower’s collateral property takes center stage in application evaluation. Hard Money lenders focus more on the potential and profitability of the property used as collateral rather than the borrower’s credit standing and financial capacity. Private lenders can make fast decisions on loan applications because they do not have to evaluate tons of financial documents just for one loan application.
Hard Money Loans Have Higher Interest Rates
Relative to the interest rates charged by traditional lenders, Hard Money lenders often charge higher interest rates for the loans they approve. The reason is that Hard Money lenders take in more risks than Traditional Lenders. Being asset-based, they also accommodate borrowers with less-than-acceptable credit histories and low credit scores. Hard Money Lenders are risk-aware institutions. They mitigate the risks with higher loan interest rates and shorter loan terms.
Quick Turnaround Time from Loan Application to Funding
In transactions where many real estate investors compete for one property, the one with funds ready often closes the deal. For many investors who need access to funds fast, hard money loans for real estate are attractive funding alternatives suitable for these kinds of investment scenarios. One prime benefit of hard money loans is that approval and fund release come within several days.
Short-Term Loans Won’t Tie You Up For Long
Hard Money loans for real estate are typically short-term contracts. Loan terms range from 3 months to 36 months. The loan period is enough for investors because they will not be bound to a lengthy loan term. Most investors in the industry plan their rehab and renovation activities within six to twelve months to minimize costs and maximize profits. For investors, a short loan term is enough time for them to renovate, do marketing, and sell or refinance the property for a profit.
How Hard Money Loan Benefits Unlock Real Estate Potential
Hard Money Loans can help unlock real estate investment opportunities for experienced and novice industry players. Some merits of hard money loans real estate investors can take advantage of are as follows:
Processing Speed and Flexibility
Hard money lenders can approve loan applications and release the funds within days, 15 days at the most. The speed of processing of hard money loans enables real estate investors to be at the forefront of buying and rehabbing distressed properties. Easy application process and readily available funding can win real estate deals, even those that are sometimes unexpected.
Access to Funding For All Investors
Hard Money Loans are open to almost all real estate investors and borrowers. Even investors with poor credit standing or those who can not qualify for traditional loans have chances of approval for hard money loans for real estate. The unconventional approach of hard money lenders in approving loan applications focuses on the collateral property’s value. Less so on other qualifiers. Thus, access to capital for real estate is available for more investors than with conventional lenders.
Fast Funds for Property Rehabilitation
Hard Money Loans are open to investment properties even if these are in disrepair and need rehabilitation. The APR or After-Repair-Value of the property collateral determines how much funds an investor can access for the purchase and rehab project. Further, property rehab can run smoothly because of quickly funded draws during construction and rehabilitation. These factors contribute to speedy renovations, enhancing the property’s value for eventual resale or as a rental. Fast fund releases mean faster recovery on investments for a tidy profit.
Risks to Consider in Hard Money Loans
While hard money loans for real estate seem to be an ideal alternative to traditional financing, especially in the real estate industry where speed is crucial, there can also be some downsides to consider and evaluate before signing the loan contract.
High Costs and Lower Loan Amounts
The non-traditional underwriting methods employed by hard money lenders expose them to more risks than commercial banks. In mitigating these risks, hard money loans come with higher interest rates and fees or points. Their rates make them costlier than traditional loans for investors. Loan amount approvals and Loan-to-value ratios are also lower, hovering at 75% of the After Repair Value.
Risk of Losing Collateral Property
In cases where an investor defaults on a loan, there is a risk of losing the property collateral. Thus, an investor has to be prudent in monitoring and utilizing funds to prevent such situations. Also, closely monitoring loan amortizations is a must to avoid missed payments. The fast turn-around time of hard money loans means that the resolution of defaulting accounts is also fast.
Short-Term Nature
Hard Money Loans are, by nature, short-term loans. An investor only has about 3 to 36 months to settle on a strategy for paying off the loan upon maturity. For real estate investors utilizing Hard Money loans, a well-planned and feasible exit strategy should always be part of the investment plan.
Conclusion, Our Final Word
Hard money loans for real estate commercial investments are valuable alternate funding tools investors can capitalize on and benefit from. Investors can utilize Hard Money Loan solutions when traditional financing is elusive and impractical. However, investors must assess the risks for proper mitigation. Doing this will help in minimizing project costs and health.
To know more about the investment potentials hard money loans can open for you, call us now or email us at info@gllholdings.com. We also help evaluate your potential real estate investment.
