Funding property acquisitions via hard money real estate loans is normal for property investors. Commercial investors, house flippers, and developers all utilize hard money rather than institutional financing. They have their reasons. For them, hard money real estate loans represent a better opportunity.
If you are not familiar with hard money real estate loans, the first thing to know is that they come from private lenders rather than banks. Private lenders pool the financial resources of multiple investors to lend out. They can do so more quickly and with fewer hassles because they are not subject to the same rules that banks must follow.
Here are four key characteristics of hard money real estate loans, compliments of Salt Lake City’s Actium Partners:
1. Backed by Collateral
Licensed financial institutions approve loans based on a borrower’s good faith and credit. That’s why they look into things like income, credit history, and debt load. Hard money lenders are different. They make approval decisions based on the collateral borrowers offer.
Collateral needs to be worth at least as much as the amount being borrowed. If it is worth more, approval is more likely. One way or the other though, collateral is the single most important factor in loan approval.
2. Lower Loan-to-Value Ratios
Private lenders offering hard money real estate loans work with loan-to-value (LTV) ratios just like financial institutions. But their LTVs tend to be lower. Where a bank’s LTV might be 75% or more, hard money lenders tend to be in the 50%-60% range.
In real terms, this means that borrowers need to come in with larger down payments. They need to put more skin in the game, so to speak. This is by design. Lenders know that higher down payments weed out risky investors. They also spread the risk more evenly among both parties.
3. Faster Funding
The third key characteristic, faster funding, is the most attractive characteristic to a lot of real estate investors. The real estate game moves pretty quickly. Deals are made and closed in weeks rather than months. As such, investors need access to real estate loans that can be arranged quickly. Hard money loans deliver.
Actium Partners can typically fund a loan in days. Though not the norm, they have been known to fund loans in under 24 hours. They can move extremely quickly if they need to. Real estate investors appreciate that.
Speedy funding means obtaining more properties rather than losing them to competitors. It gives real estate investors more flexibility as they seek to add to their portfolios because they are not hanging around waiting for lenders to come through.
4. Higher Interest Rates
The one downside to hard money real estate loans is that they typically come with interest rates considerably higher than what banks offer. But there is a valid reason for it. Hard money loans are short-term loans with terms usually no more than two years. That is not a lot of time for lenders to earn the kind of interest they would want.
Higher interest rates are a way to make up for the short terms. But understand this: higher interest rates do not always equate to higher total interest payments. The amount of total interest a borrower pays is determined by interest rate over time. So a much shorter term ultimately means less interest as well.
The four characteristics described in this post typify hard money real estate loans. If you understand them, you have a pretty good idea of just how hard money works. It works well for real estate transactions, that’s for sure.
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