Why do hard money loans (HML) exist when cheaper credit is easily available? Well, we will get back to this question, but for the time being consider this scenario.
As a real estate investor or owner, you require capital for purchase, ownership, and maintenance of a property. In such cases, borrowing money instead of tying up personal funds usually makes for a more appropriate financial strategy.
Usually, you might prefer working with a traditional lender to secure a low-interest rate debt. But if you ever find yourself in a situation where this option is not available, then a hard money loan could save the day.
It is a short-term debt that typically comes with higher interest rates and upfront fees than other types of loans. When traditional funding options are off the table, leveraging a short-term HML can help achieve your end goals.This way, it plays a vital role in the real estate world.
Now let us take a look at various instances where HML slots in perfectly and could go a long way in maximizing your capital gains in 2018:
1. Capital Improvements, Repairs, & Renovation
Investors can see the actual value of the estate which has not been maintained properly. They believe that with the right upgrades, the property can be made more appealing, thus increasing its market value. The owner can later sell or put it up for rent and enjoy a positive cash flow.
But since such properties are not in the best shape, traditional lenders will rarely finance them. They lend for ‘market ready’ properties which require minimum work and can be flipped more easily. They do not share the investor’s vision.
However, hard money lenders do not work with any such barriers and are willing to take on the additional risk. Their lending decisions are typically asset value driven and also offer more flexibility. So, if you come across a property that needs to be worked a bit, HML is the solution.
2. Purchasing Property
There is an old saying that timing is everything. This phrase particularly holds true in the property world. Hard money loan is an effective way of financing real estate purchases. Good opportunities and strategic purchases can be time sensitive.
There are times when a good property does not go to the highest bidder, but the one who can close the deal more quickly. In such cases, the painstakingly long lending procedure of traditional lenders isn’t recommended. Hard money lenders can get things done a lot quicker than banks.
While a traditional and government-backed loan can be processed in 1-3 months, a hard money lender can give you the required funds in a matter of 10-15 days!
3. Property Construction
Many developers are interested in the ground up construction of a project. Even though many lenders offer construction loans, they all have separate niche and guidelines. The borrower’s collateral, creditworthiness, equity in project, experience, financial reserves, project presentation, timeline, etc. are just some of the factors that the lender evaluates.
If the borrower is not impeccable in any one of these areas, it will lead to a rejection of the loan application. It is not that hard money lenders do not consider these factors, they do. But they have dedicated weights for each factor and evaluate each case differently.
Additionally, traditional construction loans come with a cap of 60-80% on the project cost. On the other hand, many experienced development hard money lenders are known to offer hundred percent financing (sometimes even more) for lucrative projects.
4. Ownership of Multiple Single-family Units
The number of properties an individual owns largely affects their ability to obtain financing for real estate purchases.
The maximum number of financed single-family residences that Fannie Mae allows an investor to own at a given time is 10 (including the primary residence). Despite the limit, many investors have a hard time finding the banks that are willing to finance their fifth purchase.
On the contrary, hard money lenders are not so concerned about the number of properties the mortgagor owns. This relaxation is particularly beneficial for investors building a portfolio of single-family units or those who are into the flipping business.
The Bottom Line
HMLs are a valuable option for short-term fix-and-flippers and buy-and-hold investors who want to revamp their investment properties. These loans have a short approval process, interest-only payments, and can provide 100% LTV for purchasing a property.
Hope all this made sense to everyone! Feel free to post your questions or comments below if something isn’t clear enough. If you are contemplating real estate investing in and around Rancho Cucamonga, CA with hard money loans, then connect with us for an irresistible deal!