Hard money loans provide many benefits to real estate investors with projects that require financing speed and flexibility. The costs of a hard money loan are higher than a conventional loan, but the benefits are clearly worth the added expense to the investors who repeatedly use hard money. Here are 9 tips on Investing with hard money loans:
- Compile the information the hard money lender needs to know about your loan
First things first. The real estate investor must receive loan approval from a hard money lender. The following is the basic information a hard money lender is going to need to begin with. Make sure all of this information is readily accessible to ensure a speedy approval and funding process.
- What kind of property will be used as collateral?
- Residential, commercial, industrial, land, etc.
- What is the estimated value of the property?
- Do some research and provide a somewhat conservative valuation
- How much down payment / equity will the borrower contribute to the deal?
- The hard money lender will require that the investor has a sufficient down payment or equity in the property. Generally the amount required is at least 20-30%.
- The smaller the down payment / equity in the property the less likely the hard money lender is going to approve the loan
- What is the requested loan amount?
- Make sure this amount is reasonable based on the project
- How will the loan be paid back?
- The borrower must have a reasonable plan in order to pay off the balloon payment at the end of the term as well as make the monthly payments
- Take advantage of fast and easy approval and funding
With hard money loans, the approval and funding process happen very quickly. This is one of the main reasons real estate investors choose hard money loans. Waiting over 45 days for approval and funding from a bank isn’t an option in many cases.
A hard money loan can usually be approved same day. A basic application for a hard money loan is only 5 pages. Funding generally takes between 5 and 10 days. If the timeline is critical loans can be funded even faster than 5 days in some cases.
This fast approval and funding process is a massive benefit for investors who are looking to quickly snatch up short sales, REOs, pre-foreclosures, auctions that allow financing and other distressed properties in which the seller wants to be paid as soon as possible and without hassle.
- Get your offer accepted on properties with multiple bids
An offer for a property paired with hard money loan financing has a better chance of being accepted than a competing offer with conventional financing. Veteran real estate professionals understand that offers with hard money loans are stronger than offers with conventional loans since hard money doesn’t have the same types of issues and problems that result in the financing being pulled during escrow. Using hard money loans results in getting more accepted offers.
Real estate investors with cash often enjoy the luxury bidding below the asking price and having their offer accepted quickly. Similarly, an investor backed with a hard money loan has more leverage to offer a lower bid and still secure the property, as hard money loans are able to close much faster than conventional financing. A seller who needs their property sold as soon as possible is more likely to negotiate and accept a lower purchase price if it means they will receive their funds earlier and with less hassle.
- Use hard money loans to leverage and do more deals
As discussed previously, offering cash for properties is a huge benefit. Sellers will generally accept cash offers over other offers contingent on bank financing. However, leverage would allow for the real estate investor to acquire more properties and do more deals. Using hard money loans for leverage allows the investor to both present a stronger offer than conventional financing and have more resources to get into more deals.