Use of hard money loans for real estate investment
August 29, 2022
Investing in real estate can be a lucrative way to build wealth, and it's an effective way to diversify your portfolio. Real estate investment trusts (REITs) and real estate crowdfunding allow you to invest passively, but some investors prefer to own real estate outright.
If you are not comfortable putting up a large amount of money to buy a property, a hard money loan might be the perfect solution for you. While this type of loan has advantages over traditional financing, it always requires a certain amount of equity.
How do hard money loans work?
Hard money loans, sometimes referred to as "bridge loans," are short-term lending instruments that you, as a real estate investor, can use to finance an investment project. This type of loan is often used by "house flippers" or real estate developers whose goal is to renovate or develop a property and then sell it for a profit. Hard money loans are made by private lenders rather than traditional financial institutions such as banks.
Unlike traditional bank loans, your ability to obtain hard money financing does not depend on your credit score. Instead, lenders use the value of the property itself to decide whether to make the loan. Specifically, lenders focus on the "after repair value," or ARV, which is an estimate of the value of the property after the renovation or development phase is complete.
There are several good reasons to consider a hard money loan instead of a traditional bank loan. Here are the main advantages that this loan option offers you:
Convenience: Applying for a mortgage takes a lot of time. Closing a loan can take months, putting you at risk of losing out on a particular investment property. With a hard money loan, it is possible to get financing within weeks or days. This is important if you are financing a large development project and cannot afford to deviate from the completion schedule.
Flexibility in terms: Because hard money loans are offered by private lenders, investors may have more leeway in negotiating the terms of the loan. You can tailor the repayment schedule to your needs or have certain fees, such as the origination fee, reduced or waived during the underwriting process.
Collateral: With a cash advance loan, the property itself usually serves as collateral for the loan. But lenders can also give investors some leeway here. For example, some lenders allow you to collateralize the loan with personal assets, such as a retirement account or residential property you own.
Hard money loans are good for investors who need financing for an investment property quickly and without the red tape associated with bank financing. When evaluating hard money lenders, pay attention to the fees, interest rates and loan terms. You should always make sure that this type of loan does not violate the long-term viability of your real estate project.
Do not hesitate to count on us when you need financing for your real estate investment, because we can offer you a wide range of financial products to suit your needs. If you have any questions or would like more information, call or text us at 800-369-2342.