Real Estate Tips |5 min read

The Best Exit Strategies for Hard Money Loans

The borrower’s exit strategy is one of the most critical parts of the hard money lending process. Before a lender accepts a loan application, they’ll want to see details about the property and how the borrower plans to repay the loan, also known as their exit strategy. Today, we’ll review some of the best exit strategies for hard money loans, what makes a bad exit strategy, and how to choose the right one for your real estate project.

Contents of This Article: 

What Is an Exit Strategy for a Hard Money Loan?

An exit strategy for a hard money loan is a clear and actionable plan for repaying the loan before the term ends. Hard money loans are typically short-term, ranging anywhere from 6 to 24 months, and have higher interest rates. This is why having a solid repayment strategy is essential if you’re using a hard money loan. 

Most hard money lenders in Washington, DC, require a well-thought-out and realistic exit strategy before they’ll fund a loan. Funding a hard money loan can be risky for lenders without seeing that you can repay it. It can also be risky for borrowers, resulting in default or loss of your investment property. Luckily, investors can use several exit strategies for hard money loans to pay them off at the end of the term. 

Top Exit Strategies for Hard Money Loans

Without a solid exit strategy in place, you’re going to have a tough time getting a hard money loan. The last thing you want to do is put yourself (and your lender) in a position that prevents you from paying off your loan. So, here are some of the top exit strategies that investors choose to pay off their loans successfully. 

Infographic of the best exit strategies for hard money loans.

  1. Refinancing
  2. Selling the Property
  3. Paying Off the Loan With Other Funds
  4. Using Rental Property Income
  5. Bridge Financing

Refinancing

Refinancing is one of the most common exit strategies for hard money loans. This strategy involves transitioning the loan into a traditional mortgage or another long-term loan with lower interest rates. It’s ideal for investors who want to hold onto the property for rental income or long-term appreciation. However, it’s important to remember that if you got a hard money loan because you didn’t qualify for traditional financing, you’d want to improve your credit or improve the property during the hard money loan term so you can secure long-term financing afterward. 

Selling the Property

Another common exit strategy is selling the property. This is most effective for fix-and-flip projects where investors purchase, renovate, and resell the property for profit. That said, if you’re exploring this method, it’s important to time the sale well and take advantage of a strong real estate market. That way, you can sell the property faster, pay off the loan, and potentially achieve significant returns. 

Paying Off the Loan With Other Funds

For investors with access to sufficient liquidity, paying off the loan with other funds is an effective solution. Borrowers can use personal savings, profits from other investments, or other business capital to repay the loan at the end of the term. That said, this strategy is best for investors who want to avoid refinancing or potential delays that may come with selling the property. 

Using Rental Property Income

Using rental property income is another effective way to repay a hard money loan. This strategy is ideal for buy-and-hold investors who plan to generate steady cash flow from tenants. That said, it’s important to ensure that the rental income is enough to cover the loan payments and other property expenses. 

Bridge Financing

Finally, bridge financing is a temporary solution for investors waiting for additional funding or a pending property sale.

Illustration of bridging a gap, symbolizing exit strategies for hard money loans.

This method involves securing a short-term loan to repay the hard money loan, allowing for more time to complete the exit strategy. However, it’s important to note that while bridge financing can be convenient, it typically comes with additional costs. As such, planning your loans carefully is essential. 

What’s a Bad Exit Strategy for Hard Money Loans?

The last thing you want for your hard money loan is a bad exit strategy. Most lenders won’t approve your loan application if you don’t have a solid plan for repaying it at the end of the term. After all, a bad exit strategy can make the loan more risky for lenders and can result in default for borrowers. 

  • Not Having an Exit Strategy- You don’t want to be an investor who can’t repay their loans. Not having an exit strategy can lead to missed deadlines and penalties, and you may even lose your investment.
  • Having an Unrealistic Plan- Not having a plan is bad, but having an unrealistic plan can be just as dangerous. Saying that you can sell the property to pay off the loan and actually doing it are two different things. So, be careful not to overestimate property values, market demand, or your financial capability.
  • Assuming You’ll Secure Refinancing- Refinancing your loan is not guaranteed–especially if property values drop or your credit is still bad. Before using this as your exit strategy, verifying lender requirements while looking into a long-term loan is crucial.

Work With a Reliable Lender at MHML Today

Exit strategies for hard money loans are critical. Taking on a hard money loan without a realistic repayment plan can lead to losing your investment and enduring several fees. However, knowing your options and planning accordingly can help you repay your loan successfully, whether you refinance it or repay it in full with other funds. 

If you want a hard money loan for your next investment near Baltimore, look no further than Maryland Hard Money Lenders. Our team of real estate loan professionals can help fund your loan quickly and efficiently. Contact us to learn more about our lending process, or start our initial loan application today!

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