Learning how to get involved in real estate investing can be a profitable and exciting adventure, but you may not always have the cash upfront to invest in a property. In many cases, it’s actually to an investor’s advantage to secure financing for a real estate investment instead of putting all their cash into a property upfront.
Although cash is king, there are a few drawbacks to paying cash for an investment property. While you won’t have to worry about paying interest or mortgage payments during vacancies, financing your property can offer a more substantial return on investment and allow investors to grow a real estate portfolio more quickly.
Additionally, tying up all of your money in a single property will make it harder for you to diversify your investment portfolio and limit your liquidity. When you’re figuring out how to get started in real estate investing, many successful investors recommend keeping your options open to avoid money mistakes.
For most real estate investors, securing financing is necessary. There are several financing options for real estate investing, but hard money loans should certainly be on your shortlist of potential financing solutions. Today, we’ll take a closer look at hard money and why a hard money lender should be part of your team when starting in real estate investments.
What Is a Hard Money Lender?
When you’re just getting started as a property investor, you’ll want to learn as much as you can about the opportunities available to you. Hard money loans can be an excellent option to fund a property you find through the Privy platform when you need to act fast without other financing secured.
Unlike mortgages, which are secured by the borrower’s perceived ability to pay back a loan, hard money loans are guaranteed by the financed property. That’s why they’re often known as asset-based loans.
Note that your credit and income will be factored into a lender’s decision, but the primary consideration will be the potential profitability of the property itself. A hard money lender will use the property’s estimated ARV (after-repair value) to determine whether the loan can be repaid.
When Should Investors Consider Hard Money Loans?
These loans are meant to be used in the short term to help investors with quick funds. Rather than the loan term lasting as long as a typical mortgage (15, 20, or 30 years), hard money loans often require repayment within a year or so.
Hard money loans will also come with much higher interest rates than other types of loans. While your interest rate will depend on the lender and market conditions, hard money loan interest rates will often range from 12% to 18% (compared to 3% to 7% for a typical home mortgage loan).
So why would anyone want to obtain a hard money loan? When choosing how you want to invest, real estate investing flipping houses can be an ideal fit for this kind of loan. Real estate investors, house flippers, and some developers may use hard money loans to fund short-term projects or snag a hot property before it hits the market. Since fix-and-flips are meant to be purchased, renovated, and sold quickly, it makes sense to use a hard money loan for financing rather than a traditional investment property loan.
“Hard money” might sound like an intimidating concept, but it’s an attractive option for many individuals. These loans aren’t typically offered by many financial institutions, which is why you’ll need to find a hard money lender for your real estate investing team who can provide you with this type of financing.
Hard money lenders are private lenders who specialize in providing these kinds of short-term loans to investors and other individuals (usually in the real estate sector). Working with a hard money lender can provide you with the opportunity to secure financing in a way that banks and other financial institutions can’t provide.
Do All Real Estate Investors Need Hard Money Loans?
Ultimately, your choice in financing will depend on your business plan and your residential real estate investments. There’s nothing that says you have to obtain hard money loans when figuring out how to get involved in real estate investing. However, hard money loans might not be the best way to go for some investors and investment properties. You may also need to evaluate your options on a per-property basis.
For example, investors who focus on turnkey properties may not want to use hard money loans. Since interest rates are higher and, loan terms are shorter, this probably won’t be the right choice for you if you prefer a buy-and-hold strategy with a rental property. In these situations, a conventional mortgage will probably align better with your plans.
However, if you’re focused on purchasing properties to rehab and sell on a short timeline, hard money loans can be a more appropriate choice. That way, you can access funding right away and complete all the necessary renovations as soon as possible. Then, you can get the property on the market and repay the loan quickly.
Why Consider a Hard Money Lender for Your Team?
Any type of property loan will come with its perks and its deficiencies. While short terms and high-interest rates are among the most notable disadvantages with hard money loans, a real estate investor should remember that they’ll lose the investment property if they cannot repay the loan. Since you’re using this real estate as collateral for your loan, the property will need to be sold if you’re unable to meet your obligations as a borrower.
However, you’ll also want to remember the benefits of this type of financing.
Hard money loans are easier to qualify for and obtain than traditional financing, making them an attractive option for investors looking to hit the ground running. Compared to conventional mortgages, which can take weeks or even months to secure, you may be able to get hard money loan funding within just a few days. Since these loans come with lower risks for the lender, they’ll be more likely to approve your financing—even if your credit score isn’t as high as you’d like.
Another perk of this type of financing is the ability to nurture an ongoing relationship with your lender. When you obtain financing from a bank or traditional financial institution, it can be an impersonal process. However, by working with a private lender on multiple properties, you build a go-to relationship for reliable funding when you need to make a quick purchase on your next real estate investments. When a lender knows that you’re trustworthy and make smart investments, they’ll be more likely to approve your loan quickly and remove barriers you might otherwise have to deal with.
For many investors, these benefits outweigh the drawbacks. Adding a hard money lender to your real estate investment team can allow you to speed up the fix-and-flip process by helping you access vital resources right away. This can help you purchase, renovate, and sell your properties without delay to maximize profitability in the long run!
Use Hard Money Loans for Hot Properties From Privy!
Before you decide on any type of financing for your rental properties or fix-and-flip investments, conduct thorough research, ensure you have a full understanding of the loan you’ll be acquiring, and find the right lending partner to support your ambitions. With a hard money lender as a resource, you’re ready to move quickly when Privy delivers the next hot property that fits your goals! Using the Privy platform gives property investors insights into the best deals in the best markets to help them build successful portfolios. Reach out soon to learn more about the Privy Advantage!
Build the team you need with the insights in our free resource, “Assemble Your Real Estate Investing Team: A Worksheet.”
