If you’re searching for hard money loans for real estate investors to get involved with real estate investments in Phoenix, Brad Loans can help! When it comes to creating wealth, real estate investments are a good option for many investors, as well as being effective for adding diversity to your portfolio. While real estate crowdfunding or REITs (real estate investment trusts) let you to invest more passively, there are a lot of investors that prefer to own the property directly. If parting with a large sum of money upfront makes you uncomfortable, then a hard money loan may be the way to go. Although these types of loans give you advantages over regular financing, there are some potential drawbacks that you should be aware of.
Hard money lenders work primarily with real estate investors and provide capital for renovating and purchasing properties. They have a well-rounded understanding of the unique needs of the investor and because of this, they work much differently than the typical mortgage lender.
How Does A Hard Money Loan Work?
A bridge loan or hard money loan is a tool for short term lending which is used by real estate investors for financing investment projects. It is quite common for bridge loans to be used by real estate developers or house flippers that have a goal of developing or renovating properties than selling them for profit. Private lenders will issue hard money loans, instead of financial institutions like banks or credit unions.
Traditional bank loans tend to focus on the creditworthiness of the borrow, while hard money loans aren’t based on solely on your credit. It is based on your ability to pay back the loan along with the merit of the real estate investment opportunity and property value to approve the loan. The lender will pay close attention to the after repair value or ARV, which is an estimate of the property value after the renovation or development has been completed. Lenders will also take into account your plan for what needs to be done to a property, who will do it, and how it will be paid for. The overall business plan is a larger factor in these lending situations than the credit history of the borrower.
Why Use Hard Money For Real Estate Investing?
Hard money lenders are in the business of funding real estate property investments – not the standard dream house of the homeowner.
Usually, investment properties need work so they can be sold at their full value. Either through resale (the classic “Fix & Flip”) or for renovating and buying a property for rental.
If a real estate investor does not have deep pockets, a hard money loan is a viable option so they do not have to pay cash for every property they buy.
Although having shorter terms and higher rates, hard money borrowing is simply a game of numbers. When everything you are investing comes together for profit, a hard money loan can be a good choice.
If you are unsure of the higher rates and lack another source of funding you may have to walk away from a great deal, so it may well be the case a hard money loan is a good choice after all.
The Top Three Reasons to Borrow Hard Money for Investment Properties
- Timing: Investment real estate is understood very well by hard money lenders. They move rapidly to get applications approved and fund the renovation and property project.
- Approval Criteria: When other people will not finance certain properties, hard money lenders will.
- Flexibility: If something goes wrong accidentally, hard money lenders are there to help and are considerably more nimble and agile than a big institution.
What Hard Money Lenders Consider When Funding A Property
Lenders will often use a decision matrix known as “The Six C’s” when they consider their options to fund a property. The goal is to minimize risk while still making money.
Lenders are looking for more than higher yields. They eat secure, safe investments that make a return on their capital and a return on investment that is solid. They need to know when they will be paid back and how. Relationship building is important to hard money lenders as they like to build repeat business with investors.
The Six C’s of Hard Money Lending
- Collateral: As lenders are in the money business as opposed to the real estate business – they carefully consider the marketability, physical condition, and potential profit among others all to determine the form of equity cushion offered by the property in its loan-to-value (LTV.) They ask “What are we left with?” should the property have to be foreclosed on.
- Conditions: In order to minimize risk, lenders look carefully into the conditions surrounding the area, what is the investment target area and the availability of resources, demands for the property, other property inventory and is the property for rental or resale?
- Capacity: lenders need to know the borrower has the capacity and the means to carry out the terms of the loan and the proposed renovations. They will look at partnerships, experience, outcomes, existing obligations and resources of the borrower.
- Capital: “No Money Down. is a misleading notion in the world of real estate investing. Lenders want you to have some skin in the game at the closing table.
- Character: lenders may also look at the character of the political borrower. They look for judgments, liens, and background checks as well as derogatory public records and their criminal background.
- Credit: Credit is not the most important thing when it comes to asset-based, hard money lending. Good credit can be a deciding factor though but it is combined with how good the other five
Private Money vs. Hard Money
Private money lenders source capital for hard money loans – but there is an important distinction. Private money lenders are individuals who work on behalf of themselves. Hard money lenders are single entities working on behalf of private lenders of money to offer their capital for a return.
When you need short term funding for real estate investments, hard money loans are often the answer. Utilized frequently by fix & flip investors. Hard money loans are quick to close and are far more flexible than mortgage loans that are traditional. hard money loans are sometimes referred to “easy money with hard terms.” In other words, they are more costly but easier to get. Real estate investors look at the cost of hard money as part of their projections for profit on fix & flip properties.
The Pros
There are plenty of reasons to think about a hard money loan or bridge loan over a conventional loan from a bank. Below are a few advantages that it provides investors:
Convenience: It takes time to apply for a mortgage, even more now with new regulations placed on lending by the Dodd-Frank Act. This means it can take months to get a loan, which means that you could be missing out on a property. But, it is possible to get funding in a few weeks with a hard money loan. Time is quite important when you are investing, especially for a large development projects if deviations can’t happen between the timeline and finishing the project.
Flexible terms: Since private lenders will offer hard money loans, it is quite possible for an investor to find a bit of wiggle room for negations on the loan terms. It is even possible to create a repayment schedule to fit what you need, or to get fees such as an origination fee eliminated or removed during underwriting.
Collateral: With a hard money loan, the investment property is the collateral for the loan. Even though, some lenders may offer you a bit of leeway on it. For instance, there may be lenders who will allow a loan to be secured by personal assets like retirement accounts or residential property owned by the investor.
The Cons
When it comes to financing, a hard money loan isn’t always a perfect solution with some downsides to think about:
Expense: Although a hard money loan is convenient, it can cause an investor to pay a higher interest rate and fees with this option. The rate can be as high as 10% greater than your average loan. Loan origination fees, servicing fees, and closing costs are much higher.
Less time for repayment: The purpose for a hard money loan is to let the investor get the property, remodel it, prepare it, and get it back on the market quickly. The result is that loans have a shorter repayment time when compared to a regular loan. If you decide to go with a hard money loan, it is important to calculate how you’re going to get the property ready and the loan paid back on time. Ensure you’ve got funding for not only the purchase but repairs, tools, or skilled labor you’ll need to get the house ready to be sold at a profit.
Overall
When it comes to getting a hard money loan, they are good for established investors that need to be quickly funded for an investment property and don’t want to wait for traditional funding channels. It removes the red tape that comes with regular bank financing. When you look into hard money lenders look at the fees, interest rates, and loan terms. In the end, if you pay too much for the loan or the repayment terms are way too short, it could diminish the profits for your investment property.
