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Hard money loans have become increasingly popular among real estate investors. This type of loan allows for highly profitable property flips without the usual wait times and administrative hassle of traditional loans. If you’re new to the hard money loan world, you’re probably wondering how exactly they work, and, more importantly, how much they actually cost you, the borrower.
What Is a Hard Money Loan?
Hard money loans are short-term loans, typically 6-12 months depending on the lender, and are offered by private lenders. The actual loan amount offered by a hard money lender is secured by an asset (usually property) as collateral. Unlike traditional mortgages or other types of secured loans, hard money loans typically have a quicker approval process which makes them ideal for fix-and-flip projects. Additionally, while the state of the borrower’s credit is still important, it’s less critical than with traditional loans since the amount is secured against property.
How Hard Money Loans are Calculated
Most hard money lenders calculate the amount you can borrow based on either the “as is value” of your property or the “After Repair Value” (ARV). A loan based on the ARV can include the repair costs along with the purchase price, which, again, is ideal for fix-and-flip or fix-and-hold deals.
Hard Money Loan Repayment
Because hard money loans are short-term, you only pay interest for the number of months you own the property. In most cases, many property flippers will sell the property before the loan term officially expires. The principal loan amount, on the other hand, is paid back to the lender once the property is sold.
Costs Associated with Hard Money Loans
Interest Rate
Many people focus solely on the interest rate for a hard money loan. Although they are typically higher than a traditional loan, the loan term is much shorter and the total interest paid is usually lower than a normal consumer mortgage. Average APR for hard money loans tends to start around 9%, but can vary depending on factors such as the lender, the property, the borrower’s qualifications, and other risk-based factors.
Buying Costs
Buying costs, such as title insurance and attorney and closing costs can be factored into the loan. Title insurance can vary based on the area of the property, type of policy and underwriter costs. Lenders may also require a property appraisal which you can factor into the buying costs.
Holding Costs
Holding costs include property tax, property insurance, and HOA fees (these are applicable to certain properties such as condos or apartments). You’re liable for property taxes once you take ownership of the property, and the value of the home will ultimately determine the monthly property insurance costs.
Selling Costs
Selling costs can include realtor fees, attorney and closing costs, staging costs, and transfer and conveyance fees.
Finding a Hard Money Lender
There are many hard money lenders out there, so be sure you find a reputable company with a proven track record. Searching online for reviews and recommendations from investors in the same boat as you can help you determine which lender to get a hard money loan through. Additionally, a reputable lender will steer you in the right direction to find a loan that suits your property investing goals.
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 financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Connect with us today to discuss your next investment.