This is not investment advice and should not be construed as such.
Real estate has stood out for years as a smart way to build wealth and secure your financial future. However, a significant barrier to this investment is the high upfront cost which often intimidates newer investors. Considering traditional bank loans can be challenging to obtain and slow down the process, savvy investors on a budget need to think outside the box for alternative financing solutions.
That’s where hard money loans come in. These loans are secured by the property, and investors can obtain them quickly, making this solution a popular choice for real estate investors. This article will explore five good reasons to start a rental property business with a hard money loan and how it can benefit your investment strategy. Let’s get started:
5 Good Reasons to Start a Rental Property Business with Hard Money Loan
Quick Access to Funding
Hard money loans are a popular choice for real estate investors because they offer quick access to funding. Traditional bank loans can take weeks or even months to process, which can significantly hinder investors looking to close deals quickly. With a hard money loan, investors can typically secure financing in days or weeks, making it easier to take advantage of profitable investment opportunities.
Flexible Requirements
Another excellent reason to look into a hard money loan is that they have more flexible requirements. Hard money lenders are less likely to reject potential borrowers because they have poor credit scores or low income. This is because hard money loans are secured by the property rather than the borrower’s creditworthiness. In other words, if an investor cannot repay their loan, they lose the property. Thus, if the property meets specific criteria, investors can often secure financing even with a low credit score or inconsistent income.
Higher Loan-to-Value Ratios
Hard money loans typically have higher loan-to-value ratios than traditional loans. In other words, private investors are more willing to offer a significant percentage of the property’s value than a bank or conventional institution. Thus, you can use a hard money loan to start investing and get a reasonable rate for your investment. This feature is great news for investors with smaller capital as it can be a significant advantage when building a rental property portfolio. Investors can acquire more properties and build their portfolios faster with a higher loan-to-value ratio.
No Prepayment Penalties
Hard money loans often come with no prepayment penalties. That means investors can pay off their loans early without additional fees or fines. This feature can be a significant advantage for investors who want to pay off their loans quickly and reduce their debt burden. However, you should always read the terms of your contract, as not all lenders use this policy.
How to Qualify for a Hard Money Loan
Despite hard money lenders providing investors with access to quick funding and more flexible requirements, giving them a solid reason to say yes would be in your best interest. Here’s a guideline on how to qualify for a hard money loan:
Choose the Right Property
Lenders have standards for the condition and location of properties they’re willing to fund. Investors that present homes in good condition located in a desirable area increase their chances of getting approval because the property will serve as collateral for the loan. Some lenders might even hire an appraiser to assess the value of a home. Remember that lenders want to ensure they can recoup their investment if the borrower defaults, so you must present a high-value property.
Create a Clear Plan for Property Use and Exit Strategy
Investors with a clear plan for using the property are less likely to default on their payments. Whether your exit strategy is performing a house flip, leasing the property, or reselling it, a clear timeline for your project can convince a lender to back you. For example, if the investor plans to rent the property, the lender will want to see a detailed plan for how the property will generate income.
Demonstrate Experience in Real Estate Investing
You can reassure a potential lender that you’re a safe bet by demonstrating experience in real estate investing. Hard money lenders are often more willing to work with experienced investors with a successful track record. Proving that you have the knowledge and skills necessary to make the project profitable can put your mind at ease and improve your chances of approval. On the other hand, if you’re newer to real estate investing, it might take a lot of work to secure a loan.
Prove You Can Make the Required Payments
Investors will need to demonstrate that they can make the required payments on the loan. This process may involve providing documentation of income or assets, such as bank statements or tax returns. While private lenders might not require a solid financial background to back you, it certainly helps to know the borrower has the means to repay the loan, even if the project does not go as planned. Besides, it also gives you more leverage to negotiate better terms since you’re less of a liability.
Boost Your Credit Score
As highlighted in the previous section, hard money loans have more flexible requirements. However, it also means they have more flexible terms, and savvy investors can use that feature. While credit scores are less critical in hard money lending, investors with high creditworthiness are more likely to get better deals. Also, it would help if you were prepared to provide documentation of past loans or other credit history. Still, remember that the lender will primarily focus on the property as collateral for the loan.
Typical Hard Money Loan Rates
Typical hard money loan rates vary depending on the lender, borrower, and property. Generally speaking, hard money loans are more expensive than traditional bank loans, with interest rates ranging from 7% to 15% or higher. Also, hard money loans often have higher fees, such as origination, underwriting, and service fees. The rates and fees are typically higher for riskier loans, such as those for properties in poor condition or areas with high foreclosure rates. Ultimately, the rates and expenses associated with a hard money loan will depend on the specific circumstances of the borrower and the property.
Conclusion
Starting a rental property business can be a lucrative investment opportunity, and using a hard money loan can make the process smoother and more efficient. By securing funding quickly and with more flexible requirements, investors can seize opportunities and build their rental property portfolio faster. Moreover, with the added benefits of higher loan-to-value ratios and no prepayment penalties, hard money loans are a viable financing option for real estate entrepreneurs looking to grow their businesses. So, whether you’re a seasoned investor or just starting, exploring the benefits of a hard money loan for your rental property business could be a game-changer for your financial future.
