Why Hard Money Is Ideal for Unconventional Properties
Are you an investor looking to finance your next real estate project? Whether it’s a fix-and-flip project, a mixed-use building, or a new build, you may want to explore a hard money loan. Most traditional lenders view these unconventional properties as risky and may deny your loan request. However, hard money lenders welcome them! Today, we’re reviewing hard money loans, why they’re ideal for unconventional property investments, and how to choose the right loan for your situation.
Contents of This Article:
- What Is a Hard Money Loan?
- What Are Unconventional Properties?
- Why Is Hard Money Ideal for These Investments?
- How to Choose the Right Loan for You
- Need Help Finding a Local Lender?
What Is a Hard Money Loan?
A hard money loan is a short-term, unconventional financing option generally provided by private companies or Baltimore hard money lenders. Unlike traditional loans, they focus on the value of the property rather than a borrower’s credit score or financial history. That said, hard money loans are ideal for investors needing quick funding for projects that may not meet conventional lending standards.
It’s important to keep in mind that while hard money loans are quick and convenient, they typically come with higher interest rates, larger down payments, and shorter terms. That means you’ll pay higher rates for the loan in less time than you would a traditional mortgage loan. However, if you don’t qualify for a traditional loan or want to finance an unconventional property, this is the price you’ll have to pay.
What Are Unconventional Properties?
Unconventional properties are those that don’t fit the mold of standard residential or commercial real estate. These properties typically have unique characteristics, uses, or locations that make them unsuitable for traditional financing. Some examples of unconventional properties may include:
- Distressed or fixer-upper properties
- Mixed-use buildings
- Unique buildings like tiny homes
- Non-traditional commercial spaces like warehouses or event venues
- Rural or off-grid locations
Most traditional lenders find these types of properties risky and won’t lend on them. They generally have strict requirements for lenders and the properties they want to buy. For instance, they usually want to see safe investments with clear market values and compliance with federal, state, and local codes. Luckily, most hard money lenders don’t follow these standards and are more open to lending for these unconventional properties.
Why Is Hard Money Ideal for These Investments?
Hard money loans are best suited for unconventional properties because they’re more flexible, quickly funded, and focused more on the property’s value than the borrower’s financial history. While you may try to get traditional financing for an unconventional property, you may get turned away. Here’s why hard money loans can help you secure the property you want.
- Asset-Based Lending
- Faster Funding
- More Flexible Loan Terms
- Willingness to Finance High-Risk Properties
- Access to More Investments
Asset-Based Lending
Hard money loans are secured by the investment property itself. So, while a borrower’s ability to repay the loan is still important, lenders prioritize the value of the property rather than a borrower’s credit history. On the other hand, a traditional lender spends a lot of time digging into a borrower’s finances to ensure they can repay the loan on time.
Faster Funding
Hard money lenders can approve and fund loans much faster than traditional lending institutions–sometimes even within days. That said, speed is crucial for many investors looking to take advantage of time-sensitive deals.
More Flexible Loan Terms
Hard money loans are more customizable than traditional loans. This means that you can often negotiate with lenders and come to terms that are more favorable for you and the specifics of your property. For instance, investors can negotiate repayment schedules, interest-only payments, and loan extensions that align with their project timelines.
Willingness to Finance High-Risk Properties
Conventional lenders tend to reject properties that are too risky, like distressed homes, rural properties, or structures like tiny homes. However, hard money lenders are more open to financing these high-risk investments because they care more about the potential value of the asset.
Access to More Investments
Since hard money lenders take on investment properties that traditional lenders wouldn’t, they allow investors to diversify their portfolios and explore unique opportunities. With more property options, investors can dip into investments that they normally would stray away from due to lack of funding.
How to Choose the Right Loan for You
Choosing the right loan for your real estate investment can sometimes be tricky. You have to consider factors like your investment goals, finances, and loan options. If you’re looking into buying an unconventional property, here are some steps to follow to help make the right decision.
- Determine Your Investment Goals- What is your goal for your investment property? It’s important to know what you want to achieve with your investment, whether it’s flipping it for a profit or using it as a rental property.
- Understand Your Finances- Even though most hard money lenders care more about the property’s value, you’ll still want to assess your financial stability. Knowing what you can afford can help you save for a reasonable down payment and account for monthly expenses.
- Research Different Lenders- Not all hard money lenders are the same. As such, it’s important to find a lender experienced in financing unconventional properties. You’ll want to read online reviews and ask for recommendations from other investors.
- Carefully Evaluate Loan Terms- Hard money loans generally have higher interest rates and fees, so you’ll want to evaluate how much you’ll be paying just to get the loan. Ask your lender about origination fees, closing costs, and penalties for early repayment.
- Come Up With an Exit Strategy- Your lender will want a thoughtful exit strategy, which is essentially your plan for repaying the loan. Whether you sell the property, refinance with a conventional loan, or use the property for rental income, knowing your plan for repaying the loan is crucial for lenders.
Need Help Finding a Local Lender?
Financing unconventional properties can be challenging, especially if you can’t find the right lender for your project. Luckily, hard money lenders are usually more than willing to take on unconventional properties, especially if you have a solid exit strategy.
If you’re looking for a hard money lender near Baltimore, look no further than Maryland Hard Money Lenders. Our team of experienced real estate loan professionals can help you secure the loan you need for your next investment. Contact us to learn more about our lending process, or complete our initial loan application today.
