How Hard Money Loans Can Help Grow Your Rental Business
Investing in real estate is a great way to build wealth, as long as you’re well informed and have the proper funding. That said, there are several ways to finance an investment property. If you’re not comfortable funding your property with a large amount of cash upfront, a hard money loan may be the right answer for you. Read along as we go over the basics of hard money loans and how to use them to fund your next property investment.
What are Hard Money Loans?
Hard money loans are short-term, non-conforming loans. Instead of a traditional lender, hard money loans typically come from people or private companies that accept investment properties or assets as collateral.
Additionally, most investors use hard money loans to develop or renovate a property, then sell it for a profit. On the other hand, some investors look into hard money loans if they need quick financing and don’t want to go through the process of getting approved for a traditional loan.
Unlike traditional loans, you can obtain hard money financing without worrying about your creditworthiness. Alternatively, Maryland hard money lenders look at the value of the property to determine whether or not the loan is appropriate.
Next, let’s go over how hard money loans work compared to traditional loans.
How Hard Money Loans Work
With a hard money loan, you’ll typically receive the funding you need in exchange for the physical property as collateral. Lenders typically expect to receive the full loan amount back within one to five years, plus interest. That said, interest rates for hard money loans are generally higher due to a shorter term and higher risk.
Hard money loans are somewhat similar to traditional loans since you’re paying the money back plus interest. However, hard money loans are leveraged with property or assets. Additionally, traditional mortgage loans require proof that you’ll pay the debt back, and hard money loans do not.
Most hard money loans come from individuals who lend funds depending on the value and type of collateral you’re exploiting. If you cannot repay a hard money loan, the lender will recoup the investment by selling the collateral. Therefore, the property value used to secure the loan is extremely important to Maryland hard money lenders.
Hard money loans aren’t the best financing method for everyone. After all, they’re a shorter-term loan, and you could risk your investment property if you cannot pay it back. However, some individuals may benefit from this financing method–here’s why.
Who Can Benefit from a Hard Money Loan?
Although hard money loans aren’t suitable for everyone, there are some people who can benefit from them. For the most part, hard money loans are used by developers, rehabbers, and investors who want to fix and flip properties.
Obtaining a hard money loan is quicker than a traditional mortgage, and it’s easier to obtain the money necessary to invest in real estate. However, investors must realize that interest rates are higher for a hard money loan than for a traditional loan.
Furthermore, since a hard money loan doesn’t require excellent credit or specific credentials, it can be easier for investors with an unfavorable credit history. Overall, hard money loans are great for investors that need to obtain funds quickly and easily.
Read along as we review a few ways investors can use hard money loans for real estate purchases.
How to Use Hard Money Loans for Real Estate Investments
Hard money loans are often used by investors who need quick and easy financing. That said, hard money loans can be useful for several types of investments. Here are a few examples.
- Fix and Flip Investments
- Buying Rental Properties
- Purchasing Commercial Property
Fix and Flip Investments
Investors can earn a quick profit by fixing and flipping real estate. For instance, they can purchase a fixer-upper, make valuable repairs, and flip the home to earn a profit. That said, some fix-and-flip investors opt for hard money loans instead of traditional loans since they’re quick and faster to pay off.
Buying Rental Properties
Investors who don’t qualify for a traditional mortgage or don’t want to go through the lengthy process may use hard money loans to purchase rentals. For instance, a hard money loan might be a better fit if you have poor credit, lack of credentials, or need more money than a traditional loan.
Purchasing Commercial Property
Some property types don’t qualify for traditional financings, such as commercial properties so business owners can use hard money loans instead. Additionally, some conventional loan limits won’t cover the cost of a commercial property. That said, Maryland hard money lenders can help protect investors that need additional financing.
Advantages and Disadvantages of Hard Money Loans
Like any financing method, hard money loans have pros and cons. As such, investors must do their research to find out if it’s a good decision for them. Here are some advantages and disadvantages to consider before seeking a hard money loan.
Pros of Hard Money Loans
- Flexible Loan Terms- Hard money loans are incredibly flexible, and you can negotiate the terms and conditions. On the other hand, traditional lenders are less forgiving when it comes to repayment.
- Easy Applications- There’s less paperwork required to get started with a hard money loan. Additionally, some hard money lenders will fund investors that have no prior experience.
- Less Financial Requirements- You don’t have to have excellent credit to get a hard money loan. In fact, your credit doesn’t particularly matter in this case. If you cannot pay back the loan, your investment is used as collateral.
Cons of Hard Money Loans
- Higher Interest Rates- Since a hard money lender takes a larger risk, the interest rates for this loan type are generally higher.
- Not All Lenders Are Reliable- Not all hard money lenders have the same quality. Some lenders have a bad reputation due to poor service or poor lending practices. Investors should do their due diligence before moving forward with a lender.
- Required Down Payment- Another downside to hard money loans is the need for a down payment. Although it’s not always necessary, some lenders will require investors to put down some of their own money before granting them the loan.
How to Find the Right Lender For Your Investment
As stated above, not all hard money lenders are the same. After all, lenders can vary in terms of price and quality. That said, borrowers need to find an ideal lender to benefit their investment goals.
You’ll want to find a lender that will provide quick turnarounds, fair interest rates, and reasonable conditions that allow you to maintain your cash flow. Luckily, most loans are provided by private investors who know the real estate market well.
When finding an ideal lender, ensure you provide the proper documentation. Although you won’t need as much documentation as you would for a traditional lender, a hard money lender will want some basic information about you and the property you’re looking to purchase.
Find a Trustworthy Hard Money Lender Today
Whether you’re looking to expand your rental portfolio or start your first investment, hard money loans can be extremely beneficial. First, however, finding a trustworthy and reputable hard money lender is crucial.
Luckily, you don’t have to look far! Our team of dedicated Maryland hard money lenders are well-versed and excel in hard money leading. So, contact us today if you’re interested in getting a hard money loan for your next investment project.