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Hard money loans have gained significant traction in real estate investing, particularly in the context of new construction projects. These loans serve as an alternative to traditional financing, offering flexibility and speed for developers and investors who need quick access to capital. Whether you’re a seasoned real estate investor or a first-time developer, understanding how hard money loans can benefit your new construction project is essential.
What is a Hard Money Loan?
A hard money loan is a type of asset-based loan secured by real property. Unlike traditional bank loans, which focus on the borrower’s creditworthiness, hard money lenders base their lending decisions on the value of the property being used as collateral. In the case of new construction, this typically means the land and the planned structure serve as the security for the loan.
Hard money loans are often offered by private individuals or companies, making the approval process much faster and more flexible than going through a traditional bank.
Why Use Hard Money Loans for New Construction?
Fast Approval and Funding
One of the biggest advantages of hard money loans for new construction is the speed of approval. Traditional loans can take weeks or even months to process, but hard money lenders can approve and fund a loan in a matter of days. This is crucial for developers who are looking to move quickly, secure land, or jump on a hot investment opportunity.
Flexible Terms
Hard money lenders are known for their flexibility. They can structure loan terms that work for your specific project, whether you need short-term or longer-term financing. This flexibility extends to the repayment schedule as well, which can be customized to align with your project timeline and cash flow projections.
Easier Approval Process
Since the loan is secured by the property, hard money lenders place less emphasis on the borrower’s credit history and income. This is ideal for developers who may not meet the strict criteria required by traditional banks, or who are self-employed and have a harder time showing consistent income.
Key Considerations for New Construction Projects
While hard money loans offer several advantages, there are key factors to consider before jumping into a new construction project.
Short-Term Nature
Most hard money loans are short-term, ranging from six months to three years. This aligns well with new construction projects, which generally require quick financing that can be repaid once the property is completed and sold. However, if your project experiences delays, you may face additional costs in the form of loan extensions or higher interest rates. It’s important to have a solid project timeline in place before committing to a hard money loan.
Loan-to-Value (LTV) Ratio
Hard money lenders often base the loan amount on the loan-to-value (LTV) ratio, which represents the percentage of the property’s value that the lender is willing to finance. For new construction, this is typically based on the projected value of the property once completed, also known as the after-repair value (ARV). Most hard money lenders will offer between 60-75% of the ARV, meaning you’ll need to cover the remaining costs through other funding sources or your own capital.
The Application Process for a Hard Money Loan
Applying for a hard money loan is generally much simpler than applying for a traditional mortgage. Here’s a step-by-step breakdown of what to expect:
Find a Lender
The first step is to identify a reputable hard money lender, like RCN Capital. Since these loans are often provided by private companies or individuals, it’s important to vet the lender by checking reviews, speaking with past clients, and reviewing their loan terms.
Submit a Loan Proposal
Unlike traditional loans, which require extensive paperwork, hard money lenders focus primarily on the value of the property and the construction plan. You’ll need to provide detailed information about the land, the construction project, and the estimated after-repair value (ARV) of the completed property.
Review and Approval
Once the proposal is submitted, the lender will review the project and determine the loan’s terms. This process is usually quick, with approvals often granted within days. After the loan is approved, the funds are typically released in stages called draws, corresponding to different phases of the construction process.
Is a Hard Money Loan Right for Your Project?
Hard money loans can be an excellent option for new construction projects, especially when speed and flexibility are crucial. However, it’s essential to weigh the pros and cons carefully. Higher interest rates and short repayment terms mean that these loans work best for developers who have a clear project plan and timeline, and who are confident in their ability to complete and sell the property quickly.
For those who are experienced in real estate development or have solid plans in place, hard money loans can provide the quick funding needed to seize opportunities and complete a new construction project efficiently.
RCN Capital
The easiest way to save on your next investment is to obtain financing from a real estate lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are looking to finance a fix and flip project, RCN Capital has competitive loan options available.
