Hard money loans play an integral role in helping real estate investors to finance short-term investment projects and rental properties. They offer fast closings, flexible loan terms, fund rehab projects, and can be an invaluable resource for investors. In this article, we will explore some of the largest benefits that partnering with a hard money lender in 2022 can offer.
Quick Approvals and Fast Closings
One of the most common questions that prospective borrowers have is, “How fast can a hard money lender close?” The short answer to this question is in as little as 3-5 days. This is due largely to there being fewer requirements for getting a hard money loan approved. Hard money lenders are less concerned with the borrower’s credit score and income than conventional lenders. They lend primarily based on the value and profitability of real estate projects. This means that there are far fewer documents to obtain and review.
Lower Credit Scores Accepted
Conventional banks regularly decline potential borrowers based on their credit scores. Hard money lenders, however, are more concerned with the profitability of the subject property. Thus, hard money loans open real estate investing up to more investors and can even help property owners with lower credit scores to refinance an existing mortgage.
Funding Rehab Properties
Rehab properties typically offer excellent profit margins. Since they need work, investors can buy them at lower prices, add value, and sell them at a profit. Conventional lenders are risk-averse to these types of deals. And uninhabitable properties are not eligible for conventional financing.
Conventional lenders also do not take the after repaired value of the property into account. This means that they will lend up to the “as-is” appraised fair market value of the property. The investor will need to obtain other funds to pay for the rehab costs. Hard money lenders, however, regularly fund rehab projects. Borrowers can get the funds to both acquire the property and fix it up.
Achieving Scale
Successful real estate investing is both opportunistic and repeatable. Investors need capital to acquire properties that hit the market before other investors can snatch them up. And to achieve scale, investors need business processes that are efficient and can be replicated to acquire in future deals.
With conventional financing, borrowers typically must sell a property or pay off an outstanding mortgage before borrowing more money to buy another property. But hard money loans provide the flexibility to invest in multiple properties at once. Thus, investors can take advantage of profitable deals and can earn more through increased volume.
Resources and Experience
Hard money lenders are an excellent professional resource. They can provide advice and relevant market information. For example, hard money lenders can provide you with comparable sales to help you gauge the after repaired value of a potential property. Moreover, they can be a great source of referrals since they tend to have established networks. Some examples of parties that they can refer include contractors, attorneys, title companies, real estate agents, and even local wholesalers that can be a source for new deals.
Flexible Terms
With conventional financing, both eligibility and the loan terms are highly dependent on the creditworthiness of the borrower. If the borrower’s credit score does not meet a minimum threshold, then the loan will not be approved. Borrowers that have weaker credit profiles are more likely to pay higher interest rates and/or put more money down.
Hard money loans, however, are asset-based. The underwriter evaluates the viability of the real estate project to determine whether it is a viable investment. For example, the lender may consider the purchase price of the property, the estimated rehab costs, and what the fair market value of the property will be following the improvements. The hard money lender’s primary concern is that there is enough equity in the property to secure repayment of the loan if the borrower defaults.
Hard money lenders have far more flexibility when it comes to loan terms and conditions. For example, the length of the loan and potentially the amount of the monthly payments. Moreover, borrowers can fund both the acquisition and rehab costs, whereas with conventional financing the lender will only fund the acquisition.
No Prepayment Penalties or Limited Prepayment Penalties
Hard money loans can typically be paid off before the expiration of the loan term without incurring a prepayment penalty. This gives investors a lot of flexibility since many projects are finished earlier than the standard 12-month loan term. Depending on the program, some hard money loans may have limited prepayment penalties. This means that loans can be paid off after a specified number of months. Conventional loans, however, often include prepayment penalties that span many years. So, while borrowers may incur lower monthly interest with a conventional loan, a prepayment penalty can quickly eat into their profit margin.
Summary
A hard money lender can be an invaluable partner and resource for real estate investors. They offer investors flexible loan terms and quick approvals to finance short-term investment projects and rental properties. Borrowers that cannot qualify for conventional financing because of poor credit histories can likely obtain the funds that they need from a hard money lender. The reason is that hard money lenders care more about the profitability of a real estate project than the borrower’s credit score. Hard money lenders also fund rehab projects and allow investors to achieve scale by financing multiple properties without the need to pay off an existing mortgage.
West Forest Capital is a leading hard money lender. Our experienced team provides funds to investors and others that are interested in financing non-owner-occupied real estate. We offer financing for a broad range of properties such as apartments, multi-family, commercial, industrial, and land deals. To learn more about our loan programs or to discuss a potential deal, contact a member of our team today.
