Using a Hard Money Loan to Purchase a Rental Property
Hard money loans, also known as bridge loans, are one of the many financing options you have as a real estate investor. But what, exactly, is a hard money loan, and when would you use this type of financing to purchase a rental property? Let’s discuss the advantages of a hard money loan and special considerations before you decide to go this route.
What is a Hard Money Loan?
Hard money loans are short-term solutions offered through private lenders. Unlike traditional loans, like mortgages, they are usually given on the projected value of the project itself (as opposed to creditworthiness). For example, one of the numbers hard money lenders might look at is the “after repair value,” or ARV. This is the estimated worth of a property after repairs or renovations have been completed.
Pros of Using a Hard Money Loan for Rental Properties
Quick Approval Process: Hard money loans typically have a much quicker approval process compared to traditional bank loans. A mortgage may take months to close, whereas hard money loans can close in a few days.This is because hard money loans are based on the collateral rather than the borrower’s credit history or financial status. In the world of real estate, time is money. A hard money loan can make sure you don’t miss out on a valuable acquisition.
Flexible Terms: Unlike conventional loans, hard money lenders may offer more flexibility in terms of repayment schedules and loan structures. This flexibility can be beneficial for entrepreneurs who need customized repayment plans.
No Minimum Credit Score Required: Individuals with less-than-perfect credit scores or those who might not qualify for traditional loans can still access funding through hard money loans, provided they have valuable collateral to secure the loan.
Keep in mind, however, that this flexibility typically only applies to investors intending to sell their properties after renovations or repairs. Equity in the property acts as both profit for the investor and cash to repay the hard money loan.
Rental properties are a long-term investment, so you will want to think of a hard money loan as a bridge that allows you to secure a property while you wait on traditional financing. In these cases, you will still need a decent credit score, tax history, financial documents, and all the other requirements of a typical mortgage.
Asset-Based Lending: The loan amount is determined by the value of the collateral, which might allow for a higher loan-to-value ratio compared to traditional loans.
Special Considerations for a Hard Money Loan
Again, hard money loans can be a great option when you need to acquire a rental property quickly or if you do not qualify for a traditional loan. They are not appropriate for everyone, however.
Higher Interest Rates: Hard money loans come with higher interest rates compared to traditional bank loans. The increased rates are reflective of the higher risk taken by lenders due to the lack of stringent credit checks and other requirements of traditional lenders. You will need to have the financial means to accommodate these rates while repaying your loan.
Shorter Repayment Period: Hard money loans have shorter repayment periods—ranging from a few months to a few years. This may lead to higher monthly payments and increased financial pressure on the borrower.
Not a Long-Term Financing Solution: Again, hard money loans are meant to be given and repaid quickly. If you do not qualify for a traditional mortgage and you do not intend to re-sell your property for a profit, a hard money loan may not be right for you. You don’t want to risk losing your property because you are unable to repay your loan.
Hard Money Loans in Colorado
If you are in need of quick financing for your next real estate venture, please contact the professionals at Pinetree Financial Partners. We have been helping Colorado entrepreneurs achieve their real estate goals for decades, and we look forward to helping your project come to life. Call or go online today to get started.