Investing in a real estate property may be an excellent way for one to make wealth, especially if it’s done well. Just like other business investments, real estate investors are also not immune to making mistakes. Therefore, before an individual invests in a property, one of the biggest mistakes he or she doesn’t want to make concerns their source of funding.
There are many sources of funding ranging from traditional loaning options such as banks, paying the property using cash, or borrowing money from a Houston hard money loaner. For those who have financial issues with the banks and don’t have the cash to pay upfront for a property, a hard loan can be a better option.
This article gives a piece of mind about using hard loans to invest in property.
What’s a Hard Money Loan?
The term “hard money loan” refers to a short term loan that an investor can borrow to develop a real estate. As opposed to the traditional mortgage, where borrowers loan money depending on their ability to repay the monthly installments, hard loaners give their loans based on a property that can provide profits to repay the installments quickly.
Who Qualifies for A Hard Loan?
This loan is mostly used by investors who need short-term loans to refurbish a house and sell it quickly. Because of the competitive nature of the real estate market, an investor needs to have cash in his or her hand fast to seal deals. Inadequate money may make investors lose such deals.
Therefore, hard loans provide a quick way for an investor to get money to fund a fix-and-flip deal that can quickly create profit that he or she can use in repaying the loan. Also, buy-and-hold property investors may borrow a hard loan to refurbish a house then pay the debt using a loan from a traditional lender.
Apart from those two types of investors, real estate investors who can’t borrow money from banks also qualify to get a hard loan. They may be unable to get a bank loan because of a bad financial and credit history, or because they can’t comply with the strict rules of conventional lenders. As long as these investors have a property that can be used as collateral by the lenders, they qualify to get a hard loan.
How A Hard Loan Works
Unlike the traditional bank loan that may take more than a month to be disbursed, hard loaners process hard loans quickly. This is ideal for real estate investors because, in the real estate market, time is of the essence, and most purchases need to take place within days.
Hard money lenders are responsible for the underwriting and sealing of deals with investors. And because of the urgency of the money, they work to ensure the application process and sealing of the contract happens in less than a week.
Private money lenders give hard loaners the money that they loan to borrowers. The private lenders are usually individuals who put their money to hard loaning intending to gain profits. That money is then loaned to real estate investors who use it to buy and renovate a property. The hard loaner ensures he or she evaluates the borrower’s property, disburses funds, and collects revenue from the loan. These loans are short term and only last a few months.
When To Use A Hard Money Loan
A hard loan can be an excellent option for an investor who doesn’t have cash but needs to purchase or refurbish a property. Most investors avoid this option because of the high-interest rates and shorter repayment periods.
However, if a borrower plans well, taking a hard loan may be the best option to make profits fast. But before doing that, he must calculate the cost of investing in property or doing repairs and note down how financing them would give him profits. If he can get returns within a short period, then the loan will be of value. On the other hand, if it will take him long to earn profits, then a hard loan is not the best fit for him.
Also, this loan is perfect for investors who can’t access other sources of funding. Instead of having to walk away from a deal because they don’t have money, they can borrow a hard loan to finance whatever they want to invest in.
The Terms and Rates of Borrowing a Hard Loan
Before borrowing a hard loan, an investor needs to know the fees, points, and rates involved with such a loan. Though getting this loan may seem simple, a lender requires the borrower to pay administrative, wire, and appraisal fees. Also, since the borrowing term is short, an investor may pay high interest for the loan to allow the lender to earn profits.
What Hard Loaners Consider Before Giving A Loan
Hard money lenders usually use a decision matrix before they fund a property. They do this intending to reduce the risk while making a profit. They don’t lend money for the sake of lending but consider whether the property that the borrower is investing in will give back gains.
Here are some things that hard loaners consider before giving an investor a loan.
1. Conditions of the property
To minimize risks, most hard lenders survey the property that a borrower intends to invest in. During the survey, they check the target market, property inventory, availability of resources, and the rental or resale property demand.
2. Capacity to service the loan
Lenders ensure that a borrower is capable of servicing the loan and renovating the investment property. To confirm this capability, they look at the borrower’s resources, experience, partnerships, and outcomes.
3. The character of the borrower
Most lenders would love to give loans to honest investors. That’s why they conduct many background checks to determine whether a borrower has criminal, judgment, and derogatory records.
Because lenders trade with their money, they carefully appraise the condition of a borrower’s property to make sure they can get value through it. They consider its marketability and equity cushion to determine the risks.
For real estate investors who want to make profits quickly by buying or refurbishing a property and selling it, hard loans can be an option. Not only does it save them from the hassles of getting a bank loan, but it also enables them to purchase property within days.
Laila Azzahra is a professional writer and blogger that loves to write about technology, business, entertainment, science, and health.