When financing investment property, investors may not always be able to use conventional financing. For this reason, investors may oftentimes turn to using hard money loans for financing real estate transactions. Hard money loans are an “asset based” type of mortgage in which a investor will receive funds that are backed by the value of a piece of underlying property.
Hard money loans are usually issued at higher rates of interest than regular conventional residential or commercial real estate loans – and, these types of loans are almost never issued by banks or credit unions.
How Hard Money Loans Work
Most hard money loans are issued by private investors. In the case of a hard money loan, the borrower’s credit score is not nearly as important to the lender as is the value of the property itself.
In most cases, these loans will require a substantial down payment from the borrower, as the largest loans are usually between 65 and 70 percent of the total value of the property. This low loan-to-value ratio will provide the lender with added security in the event that the borrower defaults on their loan repayments.
In addition to a low loan-to-value ratio, hard money loans will also typically have high rates of interest. These rates could even range between 12 and 15 percent – and in some cases, the rate may be even higher. The lender could also charge loan points as well.
Why Consider Using a Hard Money Lender?
With the high cost of borrowing, why would a real estate investor consider using a hard money lender? There are several reasons. First, hard money lenders to do not consider the personal credit of the property buyer. Therefore, if you have a low credit score, this could be the best option for you in terms of getting a loan.
In addition, oftentimes, real estate investors may already own several other properties, meaning that they may not qualify for more conventional loans based on the amount of money that they have already borrowed. In this situation, hard money loans may provide the only other option for obtaining a potentially lucrative investment property quickly.
Taking the Next Step
Once you’ve purchased a property for investment, the management of the property can often be time consuming. In this case, you may want to consider using the services of a professional property manager. This can relieve you of the duties of collecting rent from tenants, as well as from the regular property maintenance that owning investment real estate oftentimes requires.
For more information on ensuring that the purchase and maintenance of your investment property remains property remains profitable, give us a call.