A hard money loan is one of the most popular types of loans among real estate investors. Unlike most loans, you cannot simply approach your local bank or credit union for a hard money loan. Instead, you will need to approach private lenders who may be able to provide you with a short-term loan like this one to finance your new investment.
On the other hand, hard money loans can be a risky and expensive means of financing your real estate investment but they can have an attractive advantage over a conventional loan if you are able to quickly buy, fix up and sell a property at a profit.
Here are some things to consider about hard money loans:
Attractive purchase price
To achieve a low purchase price, the property usually needs some repairs. In that case, you will need to calculate estimated repair costs and comparable sales in the area to determine if there is any profit margin on the investment.
Save up for a down payment
Most lenders will not lend you the full amount needed to finance a project. Instead, they will use a calculation called the loan-to-value (LVT) ratio to minimize their risk. The LVT is basically the ratio of the loan to the value of the property.
So lenders want to see that borrowers have some skin in the game before doing business with them. Also, making a down payment mitigates some of the lender's risk and can help you get a more attractive interest rate.
In the case of a hard money loan, the lender will want you to have about 30% of the property covered with cash on hand. Although there are different strategies for obtaining that cash, one of the most recommended is to have the money in the bank, accumulated with savings. This will make your project more attractive to sellers and eliminate the need for them to place liens on other properties you own.
Choose a reputable hard money lender
Once you have taken the above recommendations into account, you can start by making a list of lender options.
But what should be taken into account to choose the best option?
There are a few barometers you can use to gauge how trustworthy a lender is. Do you have a professional website or just a landing website to gather information? Do you have an online presence and reviews on the web? Are there any lawsuits against them? Do you have a social media presence? do you have a portfolio of past projects?.
You can also ask trusted people such as other investors or real estate professionals for trusted and recommended lenders. In this way you will be able to succeed in your search and at the same time you will have the possibility to create a network of trusted real estate professionals and even join a real estate investors association.
Show real-estate experience
At this point you must demonstrate to the lender that the subject property has potential. Many lenders are not interested in your personal credit and financial history as a primary requirement, but rather place more importance on the success and profit they will be able to make on the property.
So if you can demonstrate that you have successfully invested in properties and have made a profit on previous projects, lenders will be more willing to work with you and may even offer lower interest rates and fees.
Make a quick repayment plan
Remember that venture capital loans are intended to be temporary solutions. These types of loans are usually granted with a repayment term of up to twelve months, and if you don’t repay the loan by then, you risk losing the collateral. Some lenders allow you to make a balloon repayment once you have completed your project.
If you’re ready to get a hard money loan, don’t hesitate to contact our team. We will advise you on the right, fast and easy process to potentially obtain financing for your next project.
