Introduction to Hard Money Loans
Hard money loans are a means of financing investments without borrowing money from traditional institutes such as banks or credit unions. In such cases, private money lenders finance loans without the stricter qualifying standards like credit score or income that are associated with typical traditional lenders. While the lending period is shorter for hard money loans, with higher interest rates as opposed to traditional loans, the silver lining is that private lenders are only interested in the potential return and your equity percentage in the property being borrowed on.
If you’re a real estate investor with a lack of capital or a poor financial history, a hard money loan is the solution you’ve been seeking. Another advantage of these loans is the quick turnaround time for approvals, unlike traditional banks that throw copious amounts of documentation and paperwork at you.
So, when time and other bidders are pressing concerns with a property purchase, you can be assured that hard money lenders will provide you with timely access to money. However, since the stakes are higher for private lenders due to shorter terms and lower qualifications, such loans often charge higher interest rates. This can be quite risky for investors since the short-term nature of these loans puts pressure on them to return the money within a smaller time frame.
As of 2024, hard money interest rates have spiked up to 9.5 – 12% for first-position loans and 12 – 14% for second-position ones. The increasing popularity of these loans has also increased market competition, with lenders now offering more flexible repayment options and innovations in loan structures to attract more borrowers.
Before you scramble towards your search engine for the best hard money lenders, it would be wise to understand how to use your hard money loans effectively. There are three key points that we want to touch upon; using hard money loans for short-term projects such as house flipping, finding the best-value lenders with good rates and T&Cs, and portfolio diversification, i.e., investing money in different types of real estate projects.
Tip 1: Use Hard Money Loans for Short-Term Projects
As highlighted earlier, one of the main benefits of hard money loans is the expedited approval for short-term projects. Consider fix-and-flips – you purchase a property requiring renovation, rehabilitate and improve it, and then sell it off for a profit. This process demands hefty investments for repairs and renewal and a hard money loan can easily cover both the cost of acquisition and renovation without the property having to meet stringent criteria for financing, unlike traditional lending agencies.
Additionally, by enlisting a wholesaler to find a property, you can cut on search time for real estate, since such personnel can quickly find distressed properties that sellers can’t list for a good price. With a hard money lender in your corner, you can have the distinct benefit of securing a good deal before competitors, owing to the flexibility of approvals. This means that individuals can leverage hard money loans even if they have a poor credit history.
Managing hard money loans is easier said than done, however, by doing your homework you can mitigate the risks significantly. Understanding the hard money industry is crucial to this and running background checks on lenders can be a good starting point. Once your property is renovated, try to explore other refinancing options to find an arrangement that is favorable for the property.
Tip 2: Use Hard Money Loans to Bridge Financing Gaps
Hard money loans are asset-backed and ideal for investors on the outlook for quick financing when traditional loans are either unavailable or insufficient owing to credit issues, dilapidated property conditions, or the need for quick closing times.
Suppose you come across a property that is distressed but could get you a good value after repairs and renovation, and has several bidders. In this case, the property might not meet the standardized stipulations of conventional lending institutions and a hard money lender will be your best bet for securing it quickly and in a hassle-free way. Similarly, hard money loans can be used for funding multiple real estate ventures, whether an investor wants to acquire rental property, fix-and-flip projects or pursue new construction avenues.
As the year 2024 has commenced, property flipping investors are increasingly dealing with new regulation challenges in conventional lending systems. Hard money lending has heroically saved several flippers by providing them with a loan amount based on 90% of the purchase price, plus 100% of the cost of repairs. Likewise, hard money loans have allowed wholesale personnel to quickly flip deals by obtaining money faster without buyers and sellers knowing their financial spread.
To find the best hard money lenders, one must thoroughly research using tools such as online search engines and keywords for location and types of property. Another tip is to negotiate on the terms and conditions of the loan since an experienced lender will be interested in the value of the property at the time of sale instead of its current or pre-rehabilitation value, and provide in-depth insights into potential risks and requirements of lending.
Tip 3: Use Hard Money Loans to Diversify Your Portfolio
Partnering with a hard money lender can be a viable investment as it can help you diversify your portfolio by utilizing different options for payment models or even customizing them to suit your needs. Such a lender can also provide new networking opportunities by connecting borrowers and real estate sellers since they have an array of investment services and can take on multiple projects at a time.
Hard money loans can provide investors access to various types of properties, including rentals, distressed properties, and wholesale properties, while also enabling entry into different niches such as residential, development, and commercial level projects in real estate or even the purchase of properties at auctions calling for cash offers. Investing in these options can help with the expansion and diversification of your portfolio as well. Case in point, there are many commercial investors participating in flipping transactions on single-family homes in 2024, which have shot up to 8%. By investing in different types of properties in different locations, hard money borrowers have reduced their exposure to local market conditions.
Balancing risk and reward in hard money loans is a tricky business, however, with the right strategy at your disposal, you can leverage the benefits of hard money lending while minimizing risks. Before starting, you must have a grasp on current market trends and buyer preferences. Next, evaluate your financial liquidity needs and avoid putting all your eggs in one basket by leveraging multiple exit strategies, such as refinancing a part of the loan, partnering with other investors, and selling some of your properties while holding onto others. This way, you can hedge against fluctuations in the market and optimize your cash flow.
RCN Capital
Do you have a real estate project you would like to obtain financing for? RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are looking to finance an investment with a hard money loan, RCN Capital has competitive loan options available.
