If you’re looking to purchase any type of real estate property but you don’t want to put down a large sum of money upfront to buy it, a hard money loan may be a good option for you. While there are many benefits to this type of loan over traditional financing, they don’t come without drawbacks. In this blog, we’re going to go over what hard money loans are, as well as three critical tips to know if using one.
Hard Money Loans Explained
Hard money loans, or bridge loans, are short-term loans used by real estate investors to fund investment projects. These are typically popular among house flippers or real estate developers who want to remodel a property and sell it for a profit.
There are a few differences between hard money loans and traditional financing. Hard money loans are offered by private lenders, not through traditional financial institutions like banks. Additionally, a borrower’s creditworthiness doesn’t weigh as heavily on loan approval like conventional loans, but rather the value of the property itself. Lenders are more interested in the After-Repair Value (ARV), which is an estimate of the property’s value after remodeling or development is completed.
Understand when the Property will Turn a Profit
While hard money loans have their own set of advantages, they do have some drawbacks. This is mainly due to the nature of the loan. While they rank highly in terms of convenience, they can be more costly due to fees such as closing costs and loan-servicing fees. Additionally, because the loan aims to assist an investor in getting a property ready to sell as soon as possible, there is a much shorter repayment period compared to conventional loans.
When it comes to renovations and flips, there are always unpredictable issues that can arise along the way. There are lenders out there that will try and profit from your bad luck, such as raising the interest rate or charging additional fees. For this reason, it’s critical to conduct a property market assessment and clearly understand when the unit will be profitable before applying for a hard money loan.
Familiarize Yourself with the Contract’s Terms
Loan prerequisites can differ from lender to lender. Some lenders like to see a more experienced borrower, and will allow more wiggle room when it comes to negotiating. While it can be a bit trickier to get accepted for this type of loan if it’s your first time applying, it’s not impossible. It’s likely not everything will be stated explicitly in the contract, so your association with the lender and the understanding you both have will be crucial. As a result, always educate yourself on the terms of the agreement, as well as any risks and benefits involved. This brings us into our next tip.
Don’t be Afraid to Ask Questions
It’s important to always ask questions regardless of whether you’ve worked with the lender before or are completely unfamiliar with their methods. Lenders take on risk lending to anyone. If a loan fails to perform and the borrower cannot make timely payments, the house can be foreclosed on, and the borrower will lose the time and money they invested in the project. Understanding where you stand in your contract and with the lender if any issues are to arise is very important as you go through the process of a hard money loan.
Hard money loans, if used effectively, can propel your investment to another level. While these tips may be a mere glimpse into the world of hard money loans for new investors, it’s important to not get discouraged. Before you consider a hard money loan for an investment, be sure to dive a little deeper and learn the latest industry trends, current price rates, or even talk to someone who has experience with this type of lending.
RCN Capital | Connecticut Hard Money Lender
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing as well as long-term rental financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Connect with us today to discuss your next investment.