Hard money lending is a proven funding method for real estate investors that avoids the long timelines and administrative hassles associated with traditional financing via banks. However, while these loan types may seem attractive to real estate property investors, it’s important to understand the risks associated with using hard money funding for your real estate project. Let’s take a look.
How do hard money loans work?
Hard money loans are a type of short-term loan typically used to finance real estate investments. These loans are secured by the property being purchased and generally have higher interest rates than traditional financing. Hard money loans are often used by experienced investors and can provide a fast way to raise capital for deals that may not qualify for more conventional forms of funding. Hard money loans generally have shorter repayment periods than conventional loans usually between one to three years. The length of the repayment period depends on the amount of money borrowed and other factors such as the creditworthiness of the borrower, the collateral used for the loan, and the terms of agreement between lender and borrower.
At its most basic, a hard money loan involves a lender providing funds to an investor in exchange for collateral—the property being purchased by the investor. If the investor fails to make their loan payments, the lender can repossess the property and keep it as their own.
The funding for hard money loans is generated by a group of private investors who contribute capital based on the collateral of the underlying property to a given transaction – an approach that is commonly referred to as asset-backed lending.
Asset-backed lending (ABL) is a type of financing that involves the use of collateral to secure a loan. This collateral includes assets such as real estate, inventory, accounts receivable, and equipment. Asset based loans are an attractive option for businesses that don’t qualify for traditional bank loans due to inadequate credit or a lack of financial history.
Rather than relying solely on a positive credit check, ABL lenders consider the value of a business’s existing assets to determine eligibility for a loan. This makes ABL an attractive option for those who need capital within a short time frame or have less than stellar credit scores.
When it comes to diversifying your real estate investment portfolio, investors commonly utilize private funding solutions to complete needed renovations or acquire additional revenue-generating units. Express Capital Financing offers a broad range of funding options that are ideal for when you need financing in a hurry, or when other lenders refuse to approve a loan based on financial status or credit history.
The flexibility of hard money loans
Rental properties are not exactly a dime a dozen—they require money up-front to acquire and turn into a reliable passive income source. Understandably, the vast majority of real estate investors simply do not have the cash in hand needed to acquire rental units. Unlike traditional lenders, the team at Express Capital Financing can get you the money you need in a matter of days as opposed to the weeks or months it takes for conventional lenders. This allows you the needed flexibility and liquidity to jump on promising deals without having to worry about immediate funding complications. Additionally, hard money loans can be used to purchase a variety of different property types, from single-family homes and multi-unit apartment buildings to small commercial properties such as gas stations, strip malls, and retail stores.
For investors looking to close a transaction fast and expand their real estate portfolios without shouldering a traditional mortgage, a hard money loan enables you to fund the entire deal without a down-payment or other restrictive terms—allowing you to acquire multiple properties simultaneously and increase your overall profit margin exponentially.
The perfect solution for new investors
For new investors just getting their start in the real estate market, our hard money funding resources can be a great way to assist you in kick-starting your investment portfolio diversification efforts and establishing a sustainable monthly revenue stream that can then be used to fuel future growth. Newer investors entering the investment sector generally find the initial start-up expenses to be a cost-prohibitive barrier to entry – especially the funds needed to close on their first deal. Hard money loans enable these individuals to acquire properties with little to no out-of-pocket costs in terms of advanced private capital.
It can also be challenging to obtain traditional money financing for fix-and-flip investors regardless of experience level as banks and other conventional lending entities are usually not comfortable lending on properties that are in bad condition, even if you are positive that you can complete the needed renovations and turn a substantial profit on the eventual resale of the asset. Accordingly, real estate investors that require the needed capital to fund the purchase of such distressed properties often find their options limited when it comes to lenders. That’s why Express Capital Financing is the ideal fit for house flippers looking to conduct extensive renovations or complete a quick property flip. We can get you the funding you need to both acquire and rehab the investment property in a fraction of the time it would take a bank.
Things to consider when applying for a hard money loan
There are several factors to keep in mind when approaching a private lender for a hard money loan. Some of the most important are:
Hard money lenders typically offer short-term loans with high interest rates and balloon payments at the end of the loan term. Make sure you understand all of the repayment terms before signing any paperwork.
A loan-to-value ratio (LTV) affects the amount of risk the lender is exposed to. The LTV is the ratio between the amount of money borrowed and the value of the asset used as collateral. Generally, lenders prefer to keep the LTV low in order to minimize their risk exposure. This ratio is especially important when it comes to diversifying and expanding your real estate portfolio as it will affect both the amount of money you can borrow and the interest rate that you qualify for.
Make sure you have the Collateral
Most hard money lenders use equity or real property as collateral to secure repayment of the loan in case of default. Make sure you fully understand what type of collateral will be required and if it is something you can provide. Generally speaking, lenders require a minimum of 65% of the purchase price as collateral in order to approve the loan. This means that if you are purchasing a property for $100,000, you will need to provide at least $65,000 in collateral.
Every hard money loan comes with associated fees, such as origination fees and closing costs, so make sure you understand all the applicable fees before applying for a loan. Fees can range from 10-15%, making them significantly more expensive than traditional loans. Additionally, these loans usually require borrowers to make a large down payment of 25-30%, which can be difficult to come up with if you do not have the available cash on hand.
How we can help
Our lending options can be utilized to cover shortfalls that arise during the rental ownership timeline such as offering a capital source to tap into in the event of an emergency that requires extensive repairs (e.g., a burst water pipe or HVAC failure). Our wealth of experience and extensive network throughout the industry are also available to our clients to help facilitate valuations and connections with needed service providers. When it comes to getting your foot into the proverbial door to real estate investing, don’t be discouraged by the initial purchase price of your dream rental property or fix-and-flip project. Contact Express Capital Financing today to discover how we can leverage our wealth of resources and industry expertise to help you achieve your investment goals.
What credit score do I need to apply for a hard money loan?
Having a good credit score is important to apply for any loan, including a hard money loan. Generally, lenders look for a minimum credit score of 600 or higher when considering an application. However, some lenders may accept applicants with lower scores depending on the individual’s unique situation.
When applying for a hard money loan, it’s important to keep in mind that lenders may also require a borrower to have sufficient assets to cover the loan amount.
Do I need experience in real estate to apply for a hard money loan?
No, experience in real estate investing is not always required to be approved for a hard money loan. That said, private money lenders may want to ensure that the borrower has an understanding of the investment process and is familiar with how real estate works. This will help them assess whether or not the borrower is capable of understanding and managing their own investments responsibly. Additionally, lenders may prefer to work with borrowers who have some experience in the real estate space.
What are some alternatives to hard money loans?
One of the most popular alternative financing options to hard money loans are traditional mortgages. These types of loans often offer more flexible repayment loan terms and lower interest rates than hard money loans. They also typically require much less money upfront and don’t require any collateral.
Another alternative to hard money loans are lines of credit. Lines of credit are like a revolving loan, allowing borrowers to draw on funds as needed over a certain period of time and pay interest only on the amount borrowed. This can be an attractive option for those who need short-term financing or have irregular cash flow needs.
In certain situations, a bridge loan might come in handy. While they’re not necessarily a true alternative to hard money loans, they are typically used when a borrower needs to purchase a property before they have sold an existing one. This type of loan is often used in cases where the borrower is expecting to secure long-term financing in the near future, such as when they plan to refinance with a traditional mortgage or property developers as a construction loan to bridge a gap before securing permanent financing. Bridge loans are typically offered at higher interest rates than traditional mortgages and have shorter payment requirements.
When should I consider getting a hard money loan?
Hard money loans, also known as private money loans, can be a great option for real estate investors who are looking to diversify and expand their investment portfolio. These short-term loans allow investors to purchase property quickly without the long approval process that often comes with traditional bank lending. However, it’s important to consider when you should use hard money loans to ensure they are a viable financial option.