For 35 percent of Americans, real estate is the preferred long-term investment. That puts real estate well ahead of popular investment opportunities such as stocks.
It’s easy to see why real estate investment is favored by so many investors. Few industries have churned out more millionaires through the years.
But an investment in real estate doesn’t come cheap. And if you’re among the 70 percent of Americans who admit they’re struggling financially, an investment in real estate may seem impossible. For those who know how to get a hard money loan, however, investing in real estate is a goal within reach.
But exactly what are hard money loans, and how do they work? How can you get one? How are these loans more beneficial than traditional loans?
Read on to learn more.
What Is a Hard Money Loan?
Hard money loans are a unique type of financing in which the funds you receive are secured by property rather than your creditworthiness. Usually, the collateral is the property you’re borrowing the funds to purchase. Generally, hard money loans are given by a private lender rather than a traditional bank.
Just like in a short-term bridge loan, a hard money loan is used primarily in real estate transactions.
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How Do Hard Money Loans Work?
With hard money lending, the lender approves you based on how the value of the property you’re purchasing.
The hard money lender may conduct a quick check of your finances or credit, but this process is generally far less rigorous than with traditional loans. Thus, the entire process happens a lot more quickly, and you can get funds much faster.
Of course, given that hard money lending involves significantly more risk for the lender, you can expect interest rates to be higher. Lenders may also ask for a larger-than-average down payment and the repayment period shorter.
However, as a way to finance your next real estate deal, this type of real estate funding can incredibly be convenient, especially where you have less than stellar credit.
What Can You Use a Hard Money Loan For?
As we mentioned earlier, hard money lending is typically meant to finance real estate transactions. Here are three specific investments you can fund with your next hard money loan.
House flipping is one of the most popular investment options for real estate investors, especially for entrepreneurs who’re just starting out in the industry. The model involves buying a low-cost property, fixing it up, and flipping it for a profit.
What makes hard loans so perfect for flippers is that these projects generally happen quickly. A hard loan is ideal because you get the funds you need to purchase and renovate the property within a short time.
Besides, since you’re going to be selling your home within a year or less, a lengthy loan such as a conventional mortgage is unsuitable.
Buying Investment Property
Some investors prefer rental property but find it difficult to secure traditional financing. A hard loan can be the ideal solution in such a situation. With such financing, not only do you get approved for a loan, but you also secure much more financing than you would with a conventional lender.
Purchasing Commercial Property
An entrepreneur looking to purchase commercial property may also use a hard money loan to finance the purchase. This is especially the case where you’re looking to buy a unique piece of property that traditional lenders would hesitate to finance.
How To Get a Hard Money Loan
Now that you’ve seen what hard money loans are and what you can use them for, you may be interested in getting one. Here’s a step-by-step guide to help you navigate the process.
Step 1: Prepare Your Down Payment
Just like in traditional loans, hard money lenders will require you to pay a downpayment before you can be approved for the loan. And since the hard loan is only secured by the tangible asset in question, the down payment will most likely be higher than that of a conventional mortgage.
Don’t forget about other fees, including property insurance, closing expenses, and underwriting costs.
Step 2: Create an LLC
Trading in real estate is a complex business, whether you’re considering house flipping or investing in rental property. Realize that some of your projects may not turn out exactly as you plan them. Should the unforeseen happen, a lot could go wrong, especially considering that you’re financing your projects with a short-term loan.
The best way to protect your personal assets and reduce your risk is to set up an LLC for your real estate investments. And given that hard money lenders generally do not deal with consumer loans, they’ll only lend you if you have an LLC.
The good news is that you can set up an LLC with only a few hundred dollars. The process itself is quite simple.
Step 3: Find Hard Money Lender You Can Trust
Hard money lenders are private institutions. The industry is not as heavily regulated as conventional financing. That’s why you need to be careful which hard money lender you work with to avoid getting scammed.
Generally, you want to work with a lender whose reputation is stellar. You may consider getting references and reading reviews about the lender to get a good idea about what to expect. It also helps to verify that the lender is fully licensed to operate within your state.
Enquire about how first you can expect the lender to finalize approval, as well as the rates they usually charge.
Step 4: Prepare Your Proof Of Income
While it’ll generally take much less paperwork to get approved for hard money loans, you still need to ensure you’re amply prepared. Your lender will most likely want to see proof of income. The goal is to establish that you can make the monthly payments required.
Step 5: Create Your Repayment Strategy
A hard money loan is a short-term investment. Rarely will the loan term exceed three years. For this reason, you need to have an exit strategy right from the start.
Of course, the goal is to sell your property during the loan period. That’s why most people secure hard money funding for fix-and-flip projects.
If all doesn’t go according to plan, you need a strategy to pay off the loan. Otherwise, you’re going to lose the property.
Step 6: Apply for the Loan
Now that everything is ready, it’s time to start the actual application process. For those who’ve applied for a home loan before, this process is quite easy. And given that so little prequalifying is involved in hard money lending, the entire application process should take a considerably short time.
Step 7: Review Paperwork With Your Attorney
The final step in the hard money loan process is to go through the paperwork keenly once your lender approves you. Consider doing so with a seasoned attorney to ensure you’ve understood everything in the contract before signing on the dotted line.
Why Should You Consider Hard Money Loans?
There are many reasons hard money loans are so popular among American investors today. Here are three of them.
Approval Is Easier
53 percent of all borrowers in America don’t get loans from banks due to poor credit.
One of the major strengths of hard money loans is that lenders are hardly interested in your credit score since they already have collateral. As long as the property’s value can cover the loan amount, the chances of the lender approving you are extremely high.
You Get Money Quickly
The typical bank can take a month or more to grant your loan. This is a lot of time when you’re looking to close a real estate deal quickly.
With hard money lending, the prequalification steps are significantly fewer. Thus, the entire process can be finalized within a short time, and money disbursed to your account in just days.
You Can Borrow Multiple Times
When you take a conventional mortgage, chances of borrowing a fresh mortgage before completing payments on the previous one are limited. With hard loans, things are different.
If you find another profitable deal before clearing your current loan, you have the flexibility to take another loan to fund the transaction.
Hard Money Loans Are the Ideal Financing Solutions for Investors
One of the biggest challenges of real estate investing is securing financing whenever you need it. However, once you know how to get a hard money loan, financing your deals becomes no longer a hassle.
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