Real estate investment can be a very interesting enterprise and can also make you a lot of money. Whether you are planning on purchasing houses to rent out or you intend to flip properties that you have renovated. The first thing you will need to do is raise the money to finance the initial purchase. One option you might consider is a Hard Money Loan, but what is Hard Money Loan exactly?
There are various financing options. One which many property investors choose is a hard money loan. There are various benefits to hard money loans that make them ideal for investors. They are useful for those looking to “fix and flip” properties. If you are looking for ways to raise money for real estate investment, here is everything you need to know about hard money loans.
What are Hard Money Loans?
Hard money loans are a type of secured loan which are secured with a “hard” asset. In the case of someone borrowing a hard money loan to finance a real estate purchase, that asset will be the real estate itself. The loan experts behind NewSilver explain that mortgages and other secured loans can also use a house as security. However, there is a difference.
Who Takes Out Hard Money Loans?
Hard money loans are most often taken out by people who need quick money for real estate investment. As the property market is fast-moving, the availability of this quick cash is vital. It ensures you get the best deals.
There are two mains uses of hard money loans in real estate investment:
House Flipping:
In a fix-and-flip arrangement, the goal of the real investor is to get their money back quickly. This allows them to repay the loan. The money is used to purchase a house at short notice for a low price. Then, they do it up to make it sellable at a higher price. They use the resale value to pay back the loan. There will be money left over as a profit. Some investors finance fix-and-flips with hard money loans without the credit rating to borrow from a traditional lender. Or their intended purchase doesn’t qualify for a traditional loan. As a hard money loan is then their only option, the interest rates and loan fees tend to be higher to account for the lender’s added risk.
Buy-and-Hold Rental
With buy-and-hold rental properties, investors often take out a hard money loan to purchase a house. It is in the same way as if they were going to flip it. Once the house is renovated, they can then take out a traditional loan. As the property now has more value, they pay off the hard money loan. They can then rent out the property to make money.
What are the Differences Between Hard Money Loans and Traditional Loans?
The most noticeable difference between hard money loans and more traditional loans is their repayment period. Hard money loans tend to be repaid within one to two years. More traditional loans often have repayment periods over thirty years. Interest rates for hard money loans are usually 5-10% higher than those of traditional loans. This is because they are deemed to be a higher risk for the lender. A traditional loan will be secured by both a property and the borrower’s credit score.
What Do Borrowers Use the Money For?
Borrowers must estimate the total cost of renovation to borrow the necessary amount. However, this does put some limits on what renovations can be made. Lenders will only give the go-ahead on home improvements which are certain to increase the property’s value. For example, a new kitchen and front yard landscaping would most likely be approved. However, a swimming pool or home cinema would not.
More and more people are getting into real estate investment as it can be so lucrative. Then, make the key renovations that will enable you to sell the properties quickly at a profit. If you are looking for ways to raise investment capital, make sure to check out. They might work for you.