Hard Money Loan.
A loan from a hard money lender is a short term financing arrangement made to a real estate investor who usually want to purchase and rehab a commercial or residential property. The interest rates and fees on these loans are much higher than conventional financing. They are attractive to real estate investors because most of these loans are made based on the value of the property after rehab with no seasoning requirements. The collateral is the most important qualifying criteria for these loans private lenders. The collateral is also be the crucial criteria to savvy real estate investors. The collateral is the investment and successful investing is buying low and selling high with minimum risk while investing as little money as possible. This also works for the investor who wants to keep the property for long term cash flow and appreciation. Understanding this basic investment philosophy and having a tight focus on your own real estate investment strategies will help you choose the properties.
Personal Investment Strategy.
Once you decide to invest in real estate the first choice you need to make is to determine the type of property and the location or area you want to invest in. Do you want to invest in residential or commercial property. If you choose to buy residential property do you prefer single family homes or 2, 3 or 4 unit properties. These decisions may be guided by the property available as well as financing options. Today there are many more creative financing options available to those who choose commercial real estate over residential properties. Historically it has been easier to finance single family residences. Since all financing has gotten tighter financing larger units may be a better option in todays market. In the past commercial lending required a larger down payment than investing in residential property. The reality is that in todays market there are more financing sources for commercial properties than there are for residential investment properties.
Criteria for Financing a Property with a Hard Money Loan.
A simple strategy I employ when investing in real estate, whether residential or commercial is to not invest in more than 50% of the after rehab value. That means the total acquisition costs (including financing and soft costs) plus the rehabilitation costs will be equal to or less than 50% of the After Rehab Value. Your acquisition costs include any costs associated with the purchase of the property. This includes title charges, attorneys, taxes, transfer, insurance, inspections, appraisals, and financing costs. Your rehabilitation costs are labor, materials, permits and inspections. The total of your acquisition and rehabilitation costs should not exceed 50% of the the after rehab value because you need a solid exit strategy to refinance or sell the property after your investment property has been stabalized.
When you invest property by using a hard money loan all lenders require a solid exit strategy. Remember your interest rate is much higher than you would pay for conventional financing and your loan is only for a short term as a requirement of the hard money lender and in your best financial interest you should have a solid exit strategy. A solid exit strategy is not selling the property, if you do not already have an approved buyer in place. A solid exit strategy is not refinancing the property if you can not qualify for the refinance loan. So ultimately, you should have an approved buyer in place or you yourself can qualify and have been approved to refinance the property. This is why when you choose an investment property the after rehab value should never be greater than 50% of the acquisition and rehab costs. These properties are easier to finance and easier to sell for a profit. You could even sell to another investor, pay off your hard money loan and make a profit.
Return On Your Investment.
Though the costs of a hard money loan may seem obsene at times, where can you invest little or no money in an asset that doubles in value in less than 6 months. You can investing in real estate. A hard money lender can make you a fortune if you understand leverage and choose the right properties with a solid exit strategy.