Real estate investors looking to purchase an investment property realize that they will require some form of outside financing to receive the necessary funds to complete the purchase of their property, not every investor is able to pay the full amount in cash for their investments so they have to find creative ways to obtain financing for their deals. One of the ways that real estate investors acquire the necessary financing for the purchase of an investment property is through a hard money loan. Hard money loans are defined as asset based financing through which a borrower receives funds secured by the value of a parcel of real estate.
Hard money loans differ from traditional bank financing because they offer greater leverage to the borrower and they are able to close and fund deals faster than a traditional bank loan. Investors can pay as little as 10% out of pocket for a down payment for the purchase and rehab of an investment property and can close and receive the loan funds in as few as 7-10 business days. Real estate investing is a very competitive industry with multiple investors sometimes bidding against each other for the same property, so the ability to have the funds quickly puts the real estate investor at an advantage over their competition. Leverage is another big advantage that real estate investors have by using a hard money loan.
Hard money loan terms typically last up to one year (with Lima One Capital our short-term loans go up to 13 months) and monthly interest payments are made on the loan until it is paid off by the borrower upon the sale of the property. Hard money loans are used to lend on non-owner occupied properties and most hard money lenders will lend on the ARV, or After Repair Value, of the home.
If an investor decides to pursue hard money as a means for financing, what steps would they have to take to acquire a hard money loan? Hard money loans are acquired by working with a hard money lender, who has the capital and is set up to provide the financing for the purchase of the property. Once an investor has a property that they want to purchase they will need to apply for the loan and go through the lender’s underwriting process. At Lima One Capital the underwriting process can take as little as 7-10 business days depending on how quickly all the necessary documentation is provided by the borrower. After a borrower is pre-approved and has met the borrower underwriting guideline requirements the next step will be for the property to be appraised, if the property meets the property guidelines then the borrower will be moved to closing. Once all the required documents and insurance have been approved by the hard money lender the loan will close. When the loan closes the borrower will be funded the money needed for the purchase and rehab of the property and the term of the loan will begin.
Pros of Hard Money Loans
Below are highlights of some of the pros mentioned above to using a hard money loan to finance an investment property.
- Higher leverage of capital
- Faster closings
- Shorter terms
- Easier access to financing than with a traditional bank
Using hard money is an excellent alternative to going to a traditional bank for financing on a real estate investment deal.
Types of Hard Money Loans
Hard money loans can be used for a variety of different investment projects, below you will find a list of different options to use a hard money loan to finance your next real estate investment: