To be a real estate investor, you need to have easy and fast accessibility to working capital. Conventional lending institutions fall short of acknowledging that real estate investors– and particularly those investors who rehab worn-out buildings– have special needs when it comes to the speed and also the adaptability of their financing. Hard money lenders fill the vacuum left by conventional lending institutions by providing real estate rehabbers with the money they need – and on terms that they need them.
Hard money loans are offered by firms that are often described as hard money lenders or private lenders. They are frequently privately-owned businesses that lend their own cash or cash they raise from wealthy individuals. Hard money loans are mortgages secured against real estate. In many ways, they resemble a typical mortgage financing that you might already have on your primary residence. A lending institution determines the loan amount you can get approved for and charges the regular monthly interest on this amount till you pay it off. The lien is cleared away from your title as soon as you pay off your loan. This is where the parallels end.
Three vital distinctions between hard money lenders and conventional lenders:
1. Hard money lenders specialize in financing troubled residential and commercial properties.
Traditional loan providers like credit unions and banks are not set up to lend on properties in need of repair. This is why it’s not uncommon for distressed residences to included disclosures such as “Handyman Special” or “Sold Strictly As-Is.” What do they tell you? These disclosures are essentially a warning that you should not plan to finance their purchase with a regular lender.
Unlike conventional lending institutions that don’t lend on distressed properties, hard money lenders specialize in them. They provide their investors with the optimum leverage by basing their loans on the forecasted after-repair value of the property instead of its purchase price. The after-repair value (commonly abbreviated as the ARV) is the potential listing price once you finalize your upgrades. It’s calculated by a licensed appraiser who compares and contrasts it to other rehabbed buildings in your area that are of the exact same size and style.
The ARV-based financing delivers indisputable advantages. Given that the after-repair value of the house is potentially significantly higher than its existing price, a hard money lender can lend you more money than anyone else. Some hard money lenders can finance the entire purchase amount and even contribute towards your renovation costs.
2. Hard money lenders deliver considerable underwriting flexibility.
Hard money loans are often referred to as collateral or asset-based financing. Hard money lenders are mostly concerned about your ability to generate profit by fixing and flipping a particular property. “We rarely confirm clients’ salary and don’t have minimum credit score qualifications,”– says Kyle Sennott, the Managing Partner of New Funding Resources, a Maryland hard money lender. “We underwrite holistically. If we really feel that our investor is well-positioned to earn a profit, we will find a way to work with her.” Such adaptability is particularly crucial for borrowers like contractors, real estate agents, and any other small business owners who may not declare their full earnings.
3. Competing with a buyer? No problem – close as fast as they can!
An additional reason why traditional lending institutions cannot rival hard money is the speed of closings. Sellers– and especially distressed sellers — choose to get to the closing table quickly and with minimum hassle. Cash rules but hard money loans supply the next best thing. Because of their simple underwriting requirements, hard money lenders can fund your transaction within a week or less. In many cases, they can close as fast as your title company provides a clear and insurable title.
Recap
Hard money delivers a unique way to finance the purchase and rehab of an investment property. It can propel forward both experienced and novice investors. For a person with a modest level of savings, it can open up doors to building wealth in real estate. Prosperous investors can take advantage of the fantastic leverage that hard money supplies to expand their current real estate holdings or pursue other investment opportunities.