The real estate industry can be difficult or easy, depending on what you know and how you choose to navigate the market. Even the newest entrant into the market already knows that a lot of capital is required to make any significant mark, but the problem usually lies in securing the required funds, especially at the drop of a hat.
So, if you are in dire need of financial assistance when looking to invest in this market, what is the quickest and surest way to get a substantial sum? The answer is a hard money loan. This article explains what this loan is and how it works.
What Is a Hard Money Loan?
This is a short-term secured loan that real estate investors use when they need quick money to secure a property. The loan does not check the borrower’s credit score before determining the amount to give but checks what property they already have that can be used as an asset. The worth of this property is what determines the loan amount.
In other words, the borrower must have a property against which they can borrow, using it as collateral, which is why it is called an asset-backed or secured loan. It is one of the best options for any investor in this industry because of the quick payout timeframe and the substantial amounts accessible within such a short time.
This is especially helpful in a market where time flies by fast, and making the best deals depends on how much money you have readily available. However, bear in mind that such a great offer usually comes with its own set of risks, so it helps to keep them in mind when choosing to go this route. Click here to better understand what this loan is.
How Does It Work?
A hard money loan is unique, which means that its operations are not like those of traditional loans. Still, the process is simple and quick to complete. It comes with specific terms with an emphasis on the value of the property the borrower plans to use as collateral, which is the basis of the entire process. If you are keen to get this, you can begin today by selecting the lender.
Such a lender can be another real estate investor who can provide quick money or a private company that offers a hard money loan to interested parties. The consultation will reveal whether or not you and the lender are a good fit before proceeding to the next step, which is to fill out an application and submit it for consideration.
After this, the lender will decide if they want to proceed before going to inspect and evaluate the property you have provided as collateral. This could be physical or virtual, as not every property for collateral is easily accessible in person. It also helps to speed up the process to prevent delays in the disbursement of funds.
If there is a need for renovation, it will be factored into the final evaluation before the lender can determine how much the property is worth. The amount will depend on the after-repair-value (ARV) of the property, meaning the money will depend on the actual price of the property and the cost of repair, if any.
Also, it is usually short-term, between five to nine months, with a high interest rate to be paid every month, but that is the only payment to be made within this period. Once the term is up, you must pay back the entire money in one lump sum instead of in bits. It is usually expected that that borrower will have made back the money in sales before that time in order not to default.
This briefly describes the process and its requirement. The process for getting hard money loans is completely different from that of traditional lenders which require extensive interviews and document presentation, not to mention the need to check your credit score and history. It might take about 15 business days to get a hard money loan, unlike a traditional one that takes much longer. For deals that are time-sensitive, nothing works better.
The Perfect Candidate for a Hard Money Loan
Any real estate investor is a great candidate for a hard money loan, but at the top of the list is a property flipper. This is a person who buys a property, usually a run-down one, at a low price, renovates it to perfection, and sells it to make a good profit. The loan goes into the purchase and renovation in most cases, although some spend it on the renovation alone if it is extensive.
This is also a great fit for people who want to buy, rehab, rent, and refinance a property (BRRR). With the money, they can buy whichever property they want and have extra to renovate it. When the house is ready, they can refinance it into a traditional loan like a mortgage, so they can rent or lease it.
That way, they have regular income from this investment and pay low interest over a long period. To find out more about this type of financing, follow this resource: https://themoneyknowhow.com/.
Conclusion
A hard money loan is an excellent fit for any real estate investor who needs quick funding to get in on a deal that is time-sensitive. It is based on the value of the property to be used as collateral, with the actual value and repair costs included in the lump sum, and does not require credit history or score.
However, it is pretty short-term and has a high-interest rate that must be paid during the loan duration. Afterward, the lump sum must be paid back as one sum. Weigh the pros and cons before taking this route if you are in the real estate market.