How to Finance Rental Properties with Hard Money

Hard money is used mostly by investors as a short term solution to fund real estate deals. Hard money is an excellent option that is used to fund fix and flips or buying rental properties until long term financing put in place. 

What is Hard Money Loan?

It is a type of financing used to finance properties for a short term period of six months or a year. Hard money lender use a different terms than the traditional lenders such as bank. Most lenders charge 14 to 16% and points for their money. Points are percentage of total loan and it can add costs quickly when a lender is charging 2-3 or even 4 points on loan.

Why Investors use Hard Money to Finance Investment Property?

The main advantage of a hard money lender is that they may loan the entire amount of money you need to complete a deal. Most lenders base the amount of loan on ARV (After Repair Value). You would have heard that they can loan 65 to 70% of AVR; which is not purchased price i.e. how much home will be worth once you fix the home.

How hard money deal is structured on investment property?

Let us take an example of how one hard money lender structures a deal. You have bought a house for $60,000 having AVR $130,000 and the lender says they will go up to 70% AVR on property. The lenders will loan up to $91,000 on the house based on the AVR. The hard money lender requires bids or estimates for repairs and they will pay out money for the repairs such as construction loans. They will pay 25% of the repairs required at closing and other payment will come it 25% increment and 4 points, but they will reduce the points paid after you do a few deals with them.

The cost to close this deal with a California hard money lender can add up rapidly. The interest on this deal will cost you $6,825 and the points will cost you $3,640 if you use the money for 6 months period. There are lenders that will charge lower interest and points, but will want a split of your profits. Hard money lenders can help you secure a property below market value when you have not other options.   

Choosing The Appropriate Hard Money Loan

Getting a bank or an institutional loan for commercial or residential investment properties are quite a hard job these days. Banks have to look for many different factors when determining whether or not to lend money and loan brokers may even take forever to establish a loan. Between the reticence of banks to loan funds and the length of time it can take for a loan broker, a residential or commercial hard money loan can be your very best option to take.

There are several different types of hard money loans out there. As a borrower or a real estate investor, you should have a sound knowledge of their types. You may choose the one which best suites your needs. We would like to share these types for your convenience.

The first is the “hard money acquisition loan”, it is used to purchase a specific property, typically for improved property or platted land. These loans are best when banks can’t get you the funds in time to complete the deal. If the property is not up to an institutional lender’s standard or there is an issue with credit or liquidity.

The second type is “value added loans”, a type of hard money loan for properties that have higher than normal vacancy rates and can be used to renovate a property to increase cash flow. This is a great loan when a property has a lot more potential income that it's currently generating.

Third one is “hard money land acquisition loans”. It is a way to buy land to improve. Banks and other lenders, including other private lenders, aren't financing many land deals at all so finding a hard money loan for property is going to be your best bet. Fourth is Bridge loan. These are a great way to get from point A to point B in a financial situation. These are short term loans that can be used to purchase a property while waiting on bank financing to come together. These loans typically close in a few weeks instead of the months it can take for a bank loan which could lose you the property.

Another type is “Construction pay off loans”. They are designed to help contractors who have finished a property but it hasn't sold yet. This loan is used to pay off the existing construction loan so the developer avoids losses and doesn't have to short sell the property.

At last we would say, as you can see, this variety of options available can help borrowers and contractors alike to leverage a situation that can't be leveraged any other way. While traditional lenders may not be able to work with you on a standard loan, a hard money loan is much easier to get and a lot quicker to get as well. If you're in need of a loan for a real estate deal, take a look at a hard money loan and the hard money loan rates. It may make the entire deal come together