How Hard Money Loans Work With Real Estate 2021 – Real Estate Way Pro
This article will address what hard money loans are and how hard money loans work with real estate.
Real estate can be a pretty lucrative approach to amassing wealth and diversifying your portfolio. Some investors have the luxury of buying with 100% cash or buy conventional means i.e., 20% down payment plus tens of thousands of dollars to put into the deal for repairs on a fix and flip house.
However, suppose you aren’t comfortable parting with a significant amount of cash upfront to buy real estate. In that case hard money loans may be the best option for you. This begs the question: is hard money a good idea for investors? While this form of loan has faced skepticism over the years, it has multiple advantages that it can offer over traditional financing.
This article covers all you need to know about hard money loans 2021. It highlights its modus operandi, potential benefits, and actionable steps you can leverage to refinancing this loan into conventional long-term loans when necessary.
***See this article on the 5 ways real estate makes you money***
What is a hard money loan?
In essence, it is an asset-based loan financing, which qualifies a borrower to funds secured by real properties. Many consider these loans as short-term bridge loans or loans of last resort. Mainly, hard money loans are used for transactions evolving real estate and are typically issued by companies or private investors. Considering its risks and durations, interest rates are relatively low compared to conventional alternatives.
How do hard money loans work?
In hard money loans, the terms and conditions primarily focus on the value of the property used as collateral, in contrast to the borrower’s creditworthiness. As mentioned earlier, traditional lenders won’t give out hard money loans. Instead, companies or private individuals issue them.
Typically, property flippers are the most common partakers of this type of loan since they are looking to renovate and resell the real estate used as collateral – usually within a year. The higher interests in hard money loans are balanced by the fact that the borrowers intend to pay up the loan within a short period immediately after they flip the property.
Is hard money a good idea for investors?
There are multiple valid reasons to consider a hard money loan instead of the conventional alternative. However, some dubious hard money lenders taint this space with their relatively challenging lending processes and over-the-roof hidden interest rates.
These lenders are instilling fear in investors. But don’t fret! Today, several countries and states have strict licensing and regulations in place that every hard money lender must obey. While there are still some downsides in this venture, the pros outweigh the cons, making hard money loans rewarding to the borrowers.
Potential benefits you get to enjoy from Hard Money Loans
1. Your convenience comes first
Without a doubt, the relatively low traditional loan interest, coupled with other negligible charges, may attract you as an investor. However, considering the mandatory requirements of bank statements, income documentation, leases, and tax returns, it can be pretty stressful, leaving you drained in no time.
Thus, as a real estate investor, if you don’t fancy such a strenuous and lengthy process involving substantial hassle, then hard money loans are the best fit for you. Although the interest may be a bit higher than the conventional, there is an assurance that you’ll obtain the short-duration loan without the headaches of gathering and submitting documents.
2. Closing more deals
On average, it takes a traditional bank 30 days to issue a loan. Considering that property values aren’t stable; they fluctuate every week, this period might be too long. As such, hard money loans are the best option since you can obtain them within a few days to a week instead of 30 days.
Within this shortened timeframe, you can close more deals using hard money loans, making it a proven and attractive alternative to conventional bank loans.
3. You'll get a YES more often than NO.
The most significant issue facing real estate investors today is acquiring loans from conventional sources. This is because traditional loan sources first verify their income and come up with the loan amount on the property’s appraised value before going through series of procedures to issue the loan. If the outcome of these procedures isn’t satisfactory, they strictly say no.
On the other hand, the gate is always open at hard money lenders. While hard money lenders also keep the property as collateral, they don’t care about the investor’s credits. They just loan an amount that is equivalent to the collateral’s value.
4. Get referral business
In your relationship with hard money lenders, you may also get to meet with other real estate professionals or other lenders who may have lucrative deals that may benefit you over time. This referral network may also let you access new properties, which you can invest in and profit from.
5. Improve, buy and sell
In cases of traditional loan sources, if you took a loan for one property, and midterm, you find another profitable deal, you cannot venture into it unless you sell the previous one or you fully repay it loans. However, in this case, hard money offers flexibility to purchase new properties, even if you are already engaged in another. This way, you’ll earn more with higher property buy and sell volume.
With all the benefits hard money loans have to offer, best believe this highlights of its pros answers your question of “should I buy a house with hard money loans?” Evidently, you should – it is a profitable venture you may want to delve into.
How to refinance hard money loans into conventional long term loans
Let’s represent this with an analogy. You have a profitable real estate property you want to hold as a rental investment, secured lucrative deals on the property with a tightly executed contract. Then, you went ahead to secure a hard money loan, which funded the property quickly, and you closed the loan. Everything becomes perfect when you leased the property above-market rent.
However, you still have to consider the last piece in the puzzle – refinancing the temporary hard money loan into conventional/traditional form. This step is critical for investors because the higher interest rates on hard loans will ultimately take a toll on the property’s cash flow. Since rates on traditional loans are relatively lower, they are the reasonable option from this time onwards.
Refinancing is pretty straightforward. Just consult with your financial agency to draft out actionable strategies in that regard. Most of them handle all the paperwork and once the process is successful, you’ll start paying your mortgage to a new lender.
If you are interested in learning how to find properties on and off of the market, read this article about PropStream and it’s competitors.
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