There are many reasons why over 90% of millionaires are invested in real estate.
Real estate happens to be one of the most effective ways of accumulating wealth, so it’s understandable if you want to dive in. The problem is that starting capital is not that easy to come by, which leads us to hard money loans.
While many people have heard of hard money real estate loans, they are often confused about them. They wonder why someone would choose to use a hard money loan when traditional financing is available.
Here are some reasons that real estate investors use hard money loans.
1. You Need Finance Quickly
When you require funds urgently, then there is nothing like a hard money loan. This type of financing can be completed in as little as ten days, which gives you the opportunity to proceed with your project without delay. The process itself will usually depend upon how quickly you and your agent can provide all required documentation.
Once this is done and approved by the lender, the funds could be deposited into your bank account within a fortnight. In most instances, hard money lenders can close and release funds quicker than traditional lenders. This makes hard money real estate loans a preferred option for many real estate investors.
2. You Require a High Loan To Value (LTV) Ratio
The majority of mortgages available today offer an LTV rate of around 80%. However, with hard money loans, you’ll be able to secure up to 100%, which allows you more flexibility. Even if you cannot access 100%, it is still worth seeking out lenders who can consider applications with an LTV above 80%, as they tend to approve more deals.
Note that most lenders’ requirements differ greatly. For instance, if you have an investment property located within government jurisdictions, then a hard money loan may not be suitable.
3. You Don’t Mind No Cash Flow or Slow Cash Flow
Depending upon the type of property, it can take months for all rental income to reach you due to inefficiencies and delays with the current processes. Due to this, many lenders will want proof that there is sufficient cash in place prior to funding a deal. At least, they have an expectation that payment will land shortly after closing.
This leaves out property types that are not high-yielding but could benefit from renovation work. You may have a hard time getting hard money real estate loans for distressed properties or those needing extensive repairs before being placed on the rental market.
A hard money lender will usually focus on how much your investment property is worth post-renovation rather than whether you have immediate rental income.
4. You’ve Got Good Equity
Some hard money lenders will not consider an application until you have at least 20-30% of the total value of the property as personal equity. Others will seek out deals where they know that your contribution is more than 50%. As such, it’s vital to do your homework and analyze the type of lender you are dealing with.
Some may only be interested in lower LTVs, whereas others focus on higher returns. This should all become very clear within a few phone calls or emails. If it’s too high, then move on to another lender who shares the same vision for your investment.
5. You Need Funds and No Other Options
If you’re facing an emergency situation where you require funds immediately to save the deal, hard money real estate loans may be a good alternative. The lenders usually have strict criteria but quick standards for dealing with applications. Usually, there is no requirement for third parties to sign on your behalf, and this can significantly speed up the process.
This can be a real lifesaver when time is of the essence. It’ll mean that if there are any issues with completion, then it won’t necessarily affect your ability to keep hold of the property.
6. You’re Looking for a Lender Who Understands Real Estate
As hard money lenders often work within real estate, they do understand its inherent risks. This means that their assessment methods tend to focus upon those aspects rather than rate your application on less relevant criteria.
As such, they are often more focused on the value of your property, its location, and how much work is required at the time of purchase rather than your personal credit score or finances.
7. You Have Equity But No Cash
If you have plenty of equity within your investment property but lack liquidity, then this can sometimes be an issue for some traditional lenders. Most of their underwriting methods will not accept a situation where little to no cash is being injected into the deal.
However, hard money lenders are usually happy to consider loans with 100% LTV if you can prove that you own sufficient assets that could provide funds in the event that there was a default on payment. Therefore, if you’re unable to access finance through a bank but have equity within your property, then hard money real estate loans could be the ideal solution.
8. You Already Have a Relationship With a Lender
A lot of investors who use hard money lenders also tend to work with the same lender repeatedly. This means they can quickly provide papers to support their applications, a deal history, and details about what they’ve paid in fees and interest on previous loans.
These can all speed up the process for subsequent investment properties as regular clients are prioritized over those coming fresh to the lender’s attention. You can even get rehab hard money loans if you’re a regular client.
The Many Benefits of Using Hard Money Real Estate Loans
Hard money real estate loans are definitely not the first choice for some people when it comes to financing a property purchase or renovation. Still, they can be beneficial in your case, so it’s a great idea to look into them. If you’re looking for accessibility, speed of funding, and flexibility, hard money loans may help you achieve your goals.
Did you like this article? If so, please check out our blog section, where we have a lot more prepared for you!
