Despite recent fluctuations in the market, real estate investing remains a very viable money making endeavor. There are any number of ways to invest in real estate, but the one thing they all have in common is a need for financing. For many potential investors, the answer to getting the money they need for a real estate deal, whether on a private home, rental property or retail space, is with a hard money loan.
In the last decade alone, the hard money lending industry has shown significant growth. According to PRNewswire, there are now many hard money lenders who regularly lend over $1 billion annually.
That translates into a significant source of potential financing which can help real estate investors get deals off the ground when traditional financing falls short.
While hard money loans can be used for many purposes, by far the most significant are rehab and construction loans. These are situations where getting immediate financing to close on a deal can make all the difference and this is when you’ll need a hard money lender you can rely on.
What are Rehab and Construction Loans?
Rehab and construction loans are just two of the many types of hard money loans available. A rehab loan is the most common form of hard money loan, used to finance either a private or commercial piece of property that is renovated and then sold for profit. In this case, the hard money lender will base the loan on the property’s after-repair value, or ARV. If the lender believes you’ll be able to make a substantial profit on the property after rehab, they will be much more likely to provide funding.
Fix and flip properties continue to be a very attractive segment of the real estate market. While home prices have seen a significant rise as the pandemic influenced economic trends, interest rates have held steady at record lows, causing Forbes magazine to predict that real estate investment will remain a potentially profitable opportunity for years to come.Source: https://www.forbes.com/sites/forbesrealestatecouncil/2021/01/25/four-options-to-finance-a-real-estate-investment/?sh=4014fbf44d28
Of course, fix and flip or rehab loans aren’t the only kind of hard money loans. Construction loans, as their name implies, are loans that are taken out in order to fund the construction of new property. They can be used to cover the cost of a land purchase and the cost of labor, supplies, permits and any other expenses involved in the construction process. Again, the value of the property once it is constructed will dictate the viability of the hard money loan and will be used as collateral.
Why Opt for A Hard Money Loan?
There are several reasons why it may be more advantageous to opt for a hard money loan rather than a traditional bank loan. In the case of rehab or construction loans one of the biggest advantages is speed. Since hard money loans don’t require a lengthy check into the borrower’s financial history, the turnaround time is significantly shorter. Most hard money loans can be approved and finalized within 3-4 days compared to as long as a month for standard loans.
When there are multiple offers on a property, having the ability to make a bid and move on it now can make a huge difference. Having ready financing can also be crucial on construction projects where there are often upfront costs that must be covered.
Hard money lenders will be able to move faster, but that doesn’t mean they won’t look at your financial status at all. They’ll have a financial stake in the deal too so they’ll want to be sure you can make good on it. But since they base their loans on the value of the property itself they have the ability to be a little more forgiving of a shaky credit score than a bank would be.
Again, since hard money lenders base their financing on the value of the property, if they consider a property to be a good bet to make a substantial profit they are also more likely to be flexible when it comes to loan terms. It may be much easier for you as a borrower to negotiate better monthly payment terms or tailor other parts of the loan agreement to meet your needs, giving you the ability to move on a deal more quickly.
Forget That Long List of Loan Requirements
If you’ve ever applied for a traditional loan then you know there can be a long list of requirements that you’ll need to meet in order to get approval. This can make it difficult for borrowers with a less than stellar financial history to be approved. Even if your finances are good, you could still face the possibility of being turned down if you don’t tick off all the boxes.
With hard money loans, you can forget about all those requirements. Since the loan is based on the property’s ARV, you don’t need to provide anything else except proof of your ability to make the monthly loan payments and cover the necessary repairs or construction costs.
Pros and Cons of Rehab and Construction Loans
As with any kind of financing, there are pros and cons when it comes to relying on hard money rehab or construction loans. While some of the benefits and risks can be specific to your individual circumstances, in general there are certain factors to keep in mind when considering a hard money loan.
- Quick Turnaround Time – Whether you need to get a leg up on other bidders or just get ahead of the game with potential constructions costs, the biggest advantage of a hard money loan is the ability to get approved quickly. Applying for a traditional loan involves many complicated and time consuming steps, especially after the latest regulations laid out in the Dodd-Frank Act. (https://www.investopedia.com/articles/wealth-management/040216/using-hard-money-loans-real-estate-investments.asp). This can slow the approval process to a snail’s pace, which can be very costly when you need to finalize a real estate deal urgently. Hard money lenders don’t face those same restrictions so they can provide final approval in much less time.
- Room To Breathe – Again, since hard money lenders are providing funding from their own assets and relying on the property’s ARV as collateral, they generally have much more room for flexibility, which can make a huge difference. For rehab loans that may mean letting you move faster to get your bid in on a property. For construction loans, it can mean giving you greater ability to work around the often tricky work and permitting process, so that you can allow for potential bumps in the road.
- Collateral, Not Credit – As collateral based loans, hard money rehab and construction loans don’t have to rely as firmly on your credit score, which can be a huge relief for investors. The property itself, whether a home, building or piece of land, is usually the primary source of collateral, but you may also be able to use other assets, such as retirement accounts as collateral as well. All of this adds up to giving you more options and most hard money lenders will be happy to work with you on loan terms since the profit you make on your investment will be as good for them as it is for you.
- Steep Interest Rates – Hard money loans are usually easier to secure but the trade off is interest rates that may be as much as 10 percentage points higher than those for traditional loans. Since hard money lenders are taking a substantial risk by providing immediate funding, they need to offset that by insuring against default. It’s up to you as a borrower to decide if paying more in interest is worth the benefit of getting the money you need now. With construction loans in particular, where permits will need to be secured and labor costs covered, this should be carefully considered before proceeding.
- Shorter Loan Terms – Since rehab and construction loans are intended to help borrowers get a property fixed or built and on the market quickly, the terms of these loans are usually quite short. Like most hard money loans, rehab and construction loans are most often 1 year loans, though some may be extended to 3 or even 5 years. While having the necessary financing quickly is important, having that short a term can be quite risky, especially on construction loans. There are many factors that can hold up construction, from obtaining permits to dealing with weather conditions, so having your loan come due sooner rather than later may be problematic.
Considering Your Options For Hard Money Lenders
If you do opt for a hard money rehab or construction loan, you’ll need to find a lender you can trust. As with almost any profession, there are always some people prepared to take advantage of a needy customer. When the financing for a potentially costly real estate deal is involved, you can’t afford to fall prey to unscrupulous lenders, so it pays to do your homework before you choose a lender.
Always start with your needs in mind. Whether you’re looking to buy a fix and flip property, a rehab property that will provide rental income or make a land purchase for new construction, you need to have a good idea of exactly what kind of financing you’ll need, how quickly you’ll need it and how you’ll be able to pay off your loan.
No matter what specific type of loan you need, you should always be sure to find a lender that specializes in hard money loans. This is important because it means that the lender will have both the expertise and the assets necessary to handle any hard money loan. Hard money lending is a business like any other, so customer reviews are always a good measuring stick. Lenders shouldn’t hesitate to provide referrals and the reactions of other customers should give you a good idea of exactly what a lender can do for you.
It shouldn’t come as a surprise if a hard money lender is eager to see your property improved since it will make them a profit too. That can be helpful, as they may be able to advise you in terms of contractors to use, permitting requirements and many other details involved in the rehab and construction process. At the same time, you need to be cautious and ensure that the lender is looking out for your interests and not just their own.
Investing in a rehab property or land for new construction can be a great way to make yourself money, but it may require financing. If you’re looking to get a rehab or construction loan, make sure that you find a lender you can trust so that you can make your investment work for you. For rehab and construction loans at competitive rates, turn to Lantzman Lending and we’ll help you start building your dream today.