Recently there has been an increasing trend of investors who would prefer to use hard money lenders instead of mainstream banks. But why?
This article explores the reasons why private money lenders are slowly surpassing traditional banks as the leading choices for smart real estate investors due to their flexibility, speed and opportunities that typical banks can hardly provide.
Why Choose Hard Money Lenders Over Regular Banks?
Quick Funding for Fast Opportunities
In real estate investing, being fast is super important. Getting a deal quickly can make or break whether you make money or lose it.
Traditional bank loans are slow. They have many steps and can take weeks or months to approve. This slow process can make investors miss out on good deals.
Hard money lenders, on the other hand, are faster.
They have simpler processes and focus on the property’s value. They can approve loans in 1-2 weeks, sometimes within 24 hours.
This speed is a big advantage in competitive markets. With quick funding, investors can act fast, make strong offers, and beat competitors waiting on bank loans.
Loan Qualification Based on Asset Value
Conventional financial institution loans mostly care about your credit score. New real estate investors or people with past money issues may find this challenging. Getting a bank loan is hard if your credit score is low.
But, private money lenders are different.
The value of property is more important than credit score. Lenders focus on the loan-to-value ratio, assessing current and potential property value after improvements.
If your property is worth more than the loan and some, your credit score matters less.
Flexible Terms for Investment
Regular bank loans have fixed rules like set interest rates and time limits.
However, asset-based lenders are more flexible. They customize loans to fit different investment plans.
For instance, fix-and-flip projects can get quick loans (6-18 months) with higher interest rates, great for fast renovations and sales. Buy-and-hold investors can get longer loans (up to 30 years) with possibly lower interest rates, perfect for managing rental properties and ensuring steady profits.
Hard money lenders also offer benefits beyond loan terms, such as interest-only payments during renovations and options to refinance into traditional mortgages post-renovation.
This flexibility allows investors to align their financing with their specific goals, maximizing returns and enabling strategic decisions, unlike the rigid options from traditional banks.
Flexibility for Different Property Types
Regular banks have tough rules for giving out loans for real estate, especially in smaller towns. But hard money lenders are easier to work with and can give loans for many types of properties.
Here are some examples:
- Single-family homes: Hard money lenders are more flexible about property conditions, allowing financing for fixer-uppers.
- Multi-family units: They can finance duplexes, triplexes, and larger apartment buildings, especially if renovations are planned to increase rental income.
- Condos: Hard money lenders can navigate HOA restrictions that often hinder traditional bank financing, opening more investment opportunities.
Hard money lenders also offer flexibility in location and financing projects.
For example, you can invest in a million-dollar mansion in California or buy $38,000 condos in Delavan, WI. This helps investors find deals outside competitive markets for better returns.
However, they may have specific requirements based on location and property type.
So it’s important to research lenders in your target market and understand their experience with your desired property type.
Things to Consider Before Using a Hard Money Lender
Direct lenders can help real estate investors, but watch out for these:
High Interest Rates
These loans don’t come cheap. We’re talking interest rates that can soar anywhere from 8% to 18%. That’s way higher than the traditional mortgages at 5% to 7%.
So, why the hefty rates?
Well, hard money loans are short-term. And lenders don’t care too much about your credit history; they’re mindful about the property value.
But, if you can’t pay the cash, the lender might have problems trying to offload the property quickly.
Short Repayment Time
Private money loans are quick fixes, lasting 6 to 18 months. This means you need a solid exit plan, like selling after renovations (common in fix-and-flips), refinancing with a regular lender, or finding other financing.
These loans aren’t for long-term investments but for swift projects.
Bottom line? Before borrowing from a hard money lender, know how you’ll repay.
Comparison: Hard Money Lenders vs. Traditional Banks
See the table below for the main differences between hard money lenders and banks.
| Feature | Hard Money Lender | Traditional Bank |
| Approval Speed | Within 1-2 weeks | 4-8 weeks or longer |
| Loan Terms | 6-18 months | 15-30 years |
| Interest Rates | 10-18% | 6-7% |
| Credit Score | 580 to 640 | 740 or above |
| Loan-to-Value Ratio (LTV) | 65% to 75% | up to 80% |
| Focus | Property value | Borrower-based |
| Flexibility | More flexible on loan terms and property types | Less flexible, standardized terms |
| Due Diligence | Less emphasis on borrower’s financials | More in-depth review of borrower’s financial history |
This table provides a general overview. Specific terms and requirements can vary between lenders and banks.
Is a Hard Money Lender Right for You?
Hard money lenders can be a handy tool for real estate investments, but they’re not for everyone. Here’s what to consider:
Property Type
If your property is in good shape or has a solid rental history, traditional banks might be better. And hard money is great for fixer-uppers or commercial properties that traditional banks might pass on.
Investment Goals
Planning to hold onto your property long-term? Traditional banks usually offer lower rates and longer repayments.
But, for quick projects like flipping houses, hard money is often the go-to for its speed and flexibility.
Financial Situation
If you have a strong credit score and steady income, traditional banks could offer better terms.
However, when your credit is below average, hard money might still work, especially if the property’s promising.
Quick Checklist
- Need fast financing for a hot property deal? (Hard money)
- Is your property a fixer-upper or not standard? (Hard money)
- Have a clear plan to repay quickly? (Hard money)
- Struggling with your credit score? (Hard money)
Remember, hard money comes with higher rates and shorter terms, so make sure it fits your needs and have a solid plan before choosing.
Conclusion
To sum up, hard money lenders can create an important asset in your real estate financing toolkit.
If speed, flexibility, and the opportunity to finance special projects are your top priority, then hard money should be on your top funding buildings list.
To avoid falling into the traps of this funding solution platform, make sure that you have done thorough due diligence when evaluating various lenders before you find someone with the best prevalent terms fit.
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