October 27, 2017 by Allen Shayanfekr
A hard money loan is a type of short-term real estate financing that allows investors to purchase properties, make necessary repairs, and pay for other expenses associated with real estate investing. Terms are typically for six months to a year and carry a higher interest rate than conventional loans. Hard money loans serve a real market need because most banks, credit unions, and traditional lenders won’t issue them due to their higher-risk nature.
There are a number of ways to use hard money loans, and real estate investors in any market can take advantage of them.
Why ARV is Important When Borrowing Hard Money
Hard money lenders specialize in investment properties. Therefore, you’ll never see them loaning full retail value for a property. Instead, they loan up to the after repair value (ARV) of a property.
Every investor, and therefore every hard money lender, uses different criteria for determining an investment amount based on ARV. Some lenders will loan money for an investment based on 65% of ARV while others may do so for 70%. Others may go as high as 80% depending on the type of investment property being funded, the condition of the property, and the investor’s exit strategy and experience level.
For example, if the ARV of a property is determined to be $150,000 and the hard money lender you want to use will loan up to 65% of ARV, that means the investor can expect to borrow up to $97,500 for the purchase and repair of the investment property.
Using Hard Money to Purchase Properties
Not all hard money loans need to be used for rehab properties. Often, however, hard money is used to purchase a property, make necessary repairs, and put that property on the market. The investor usually pays off the loan after they find a tenant for the property. If they cannot find a tenant by the time the loan is due, they are still liable for paying off the loan, so hard money loans are quite often converted into a conventional loan at the end of the term.
If a property doesn’t need rehabilitation, then the hard money lender will issue the loan based on the likelihood that the investor can find a suitable tenant.
The Top 5 Benefits Of Hard Money Loans for Investors
Hard money loans offer property investors tremendous benefits. Here are the top five benefits that property investors gain by borrowing hard money:
1. Speed and flexibility — Instead of filling out reams of paperwork, hard money lenders have short applications. They care more about the investment property than the credit score of the borrower. Investors can usually get a loan within a couple of weeks after applying. Also, once the loan has been issued, if the investor runs into problems, they can talk it through with their lender who will often help them find a creative solution, unlike conventional lenders who typically have rigid and arbitrary rules that must be followed.
2. More negotiating power — Because hard money loans come through quicker than conventional loans, a motivated seller may be more willing to negotiate the price and terms of a real estate deal if hard money is involved.
3. Credit risk is not a factor — Hard money lenders are more interested in the value and equity of the property than in some credit score or arbitrary income requirements. If the investor doesn’t pay back the loan, the hard money lender takes it as collateral and usually sells the property to recoup its losses. Hard money lenders are often investors themselves and know how to evaluate a real estate deal as an investment.
4. More leverage for other investments — Many hard money lenders, once you establish a relationship with them, will offer cash-out equity so you can make other real estate investments. Hard money also keeps you liquid so that you can have more money to make more investments.
5. Easier financing on more favorable terms — Conventional loans are difficult to get, and banks typically limit the number of loans active at one time. Property investors who are financing each property will find it easier to get a hard money loan with multiple investments already on the books. In fact, hard money lenders often see multiple-property investors as good investments with less risk.
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