Boutique hotels and resorts are part of the hospitality real estate business, which often needs unique ways to get money, like “hard money loans interest rates.” These loans, with rates typically ranging from 9.25% to 11.25%, are crucial for real estate owners who require short-term financing, as they are quick, flexible, and secured by assets.
The speed and freedom that these loans offer are directly linked to the higher interest rates that they carry. HotelLoans.Net is a specialized hotel real estate financial consulting firm that works as both a correspondent and a table lender. It has over 200 investors and 30 years of experience in underwriting.
As the name suggests, this blog’s goal is to demystify “hard money loan interest rates” for hospitality sites. It will help readers understand what causes these rates and how to get the best terms possible. This blog post discusses five key factors that significantly impact hard money loan interest rates in the hotel industry.
How Hard Money Loans Work for Investment Property
The borrower’s income or credit records are not taken into account when giving hard money loans. Instead, the value and equity of the property used as collateral are what matter. They assist with hospitality investment sites, such as purchasing land for a new hotel, securing financing for a motel, acquiring an old restaurant investment property and renovating it, or making significant changes to a vacation rental property.
You can get different kinds of hard money loans on HotelLoans.Net, like bridge loans and regular long-term loans. Debt Service Coverage Ratio (DSCR) loans differ from other types of loans. They can sometimes be a good option for hard money borrowers to refinance their loans once the property is stable and generating sufficient income. Hard money loans with terms of 6 to 24 months are ideal for obtaining cash quickly or initiating projects before transitioning to loans with longer terms and lower interest rates.
Factor 1: The LTV Ratio: A Core Determinant of Hard Money Loan Rates
One of the most significant factors affecting the interest rates on hard money loans is the Loan-to-Value (LTV) ratio. LTV is the ratio of the loan amount to the property’s value, as determined by an appraisal. To find it, divide the loan amount you want by the property’s present or expected value:
LTV=PropertyValue/LoanAmount
The “property value” for hard money loans can be either the current market value for a purchase or, more often, the After-Repair Value (ARV) for a renovation project. This is especially true for hospitality real estate. The ARV is the property’s estimated value after all planned repairs and changes are made. This is a key factor for lenders to consider when deciding whether to “fix and flip” or “fix and hold” a hospitality asset.
It is clear that the LTV ratio and the hard money loan interest rate are inversely related: a lower LTV usually means a lower interest rate. This is because a lower LTV means the money lender is taking on less risk. A lower Loan-to-Value (LTV) ratio indicates that the borrower has a significant amount of equity in the property. This provides the lender with additional protection if the borrower fails to repay the loan. This “skin in the game” demonstrates the borrower’s commitment and gives the lender significant leverage if the borrower defaults and the property needs to be sold.
A hotel investor who wants a loan with 40% equity (a 60% LTV), for example, is a much lower risk than one who wants a loan with only 10% equity (a 90% LTV). Because private buyers will feel like they have a safety net, the first option is likely to get better interest rates on money loans. On the other hand, a high LTV means that the loan is taking on more risk, which can lead to higher interest rates to make up for it.
It’s impossible to overstate the importance of the land itself as collateral. For private investors, hard money loans are secured loans, with real estate serving as the primary collateral. The lender’s risk rating depends a lot on the property’s value, usability, and availability. For example, a hotel investment property in a good location that has a history of making money might be seen more favorably, allowing for a higher acceptable LTV and, as a result, better rates, than a piece of raw land that will be used to build a recreation investment property in the future, which carries more risk by nature.
Lenders will consider the property’s type, location, state, and market demand. These factors influence their comfort level with a specific LTV ratio and, consequently, the price of the hard money loan.
Factor 2: Short-Term Loans and Their Impact on Interest Rates on Hard Money Loans
We already know that hard money loans are usually short-term loans that last between 6 and 24 months. The short repayment period is what makes this loan unique, and it has a direct impact on the interest rates that moneylenders charge. It may seem counterintuitive, but interest rates tend to be higher when the loan time is shorter. This is because lenders need to recoup their investment quickly and generate a return within a short period. A higher interest rate ensures that the lender earns a profit every month, as the costs of administration, underwriting, and capital placement are the same for both short-term and long-term loans.
It is essential to have a clear and workable “exit strategy” because these loans are only for a short time. As the loan’s term comes to an end, the borrower must have a plan for fully repaying the hard money loan. Borrowers who lack a solid exit plan are perceived as a significantly higher risk, which means they may either have to pay higher interest rates or be denied altogether.
Some common and successful ways to get out of hospitality investment properties are:
- Selling the Investment Property: This is the classic “fix and flip” scenario, where the property is acquired, renovated, and then quickly sold for a profit, using the proceeds to repay the hard money loan.
- Refinancing into a Long-Term Traditional Loan or DSCR Loan: For “fix and hold” or “fix and rent” strategies, the hard money loan acts as bridge financing. Once the property is stabilized, renovated, and generating consistent income, the borrower refinances into a more conventional, lower-interest loan (like a long-term traditional loan or a DSCR loan, which focuses on the property’s cash flow for qualification).
- Securing Other Permanent Financing: This could involve other forms of commercial real estate financing tailored to the hospitality sector, depending on the property’s performance and the borrower’s long-term objectives.
A borrower is much more appealing to a moneylender if they have a clear, reasonable, and well-thought-out plan for repaying the loan. It shows that you have thought ahead, planned your finances, and have a clear plan for how you will pay back the loan, which reduces the lender’s risk. Because of this, loan rates for money can become better. Traditional loans, on the other hand, have much longer payback terms (15–30 years).
The lender is more interested in your steady, long-term income and credit history than in your immediate plan for how to get out of the loan. For hard money, the short-term repayment plan is the primary factor that determines when to spend and how much risk to take.
Factor 3: Borrower Profile: Experience and Financial Health for Hard Money Loans
When someone asks for a hard money loan, the lender is more concerned with the amount of money they have and their experience in buying homes. People who own their own homes are less likely to lose money on real estate deals that have previously worked in their favor. This is important in the hotel business. When a borrower has a history of past successes, such as “fix and flip” projects or steady profits, lenders trust their knowledge of the market, cost estimates, and ability to identify potential problems.
Lenders of hard money loans must demonstrate that they can cover the property taxes, insurance, interest, and any other unforeseen costs that may arise. This makes lenders feel good. Many private sellers require security from the borrower, highlighting the importance of financial stability when obtaining a loan.
HotelLoans.Net checks a borrower’s credit score and real estate knowledge as part of the screening process. If you have good credit and can be trusted, you will be offered better terms and interest rates. The people or groups behind the idea are also considered, not just the product.
Factor 4: Market Conditions and Lender Specifics
Interest rates on hard money loans aren’t set in a vacuum; they’re affected by both general economic factors and the policies of individual lenders.
Market Conditions
The overall state of the economy has a significant impact on the market. For example, all lending rates tend to rise during periods of high inflation or when the Federal Reserve raises interest rates. This includes hard money loan rates. Lenders usually pass some of the higher cost of capital on to borrowers when the cost of capital goes up. When interest rates are low, on the other hand, hard money rates may also decrease. Still, they will always be higher than standard bank loans because they carry a higher level of risk.
In the private lending market, too, supply and demand operate in the same manner as they do in the cash market. Rates are likely to increase if there is a high demand for hard money loans in the hospitality real estate market. Still, there are not enough private buyers willing to lend money. On the other hand, rates can decrease when numerous eager lenders are competing for deals. Changes in regional markets, such as booming real estate markets in certain parts of the US with high investor activity or, conversely, areas with slow growth or an oversupply of homes on the market, can also impact lender trust and, in turn, prices. A lender might be more willing to offer better terms on a hotel project in a tourist spot that is doing well than in one that isn’t doing as well.
Lender-Specific Policies
You should be aware that different money lenders, such as private investors and larger companies like HotelLoans.Net, have varying risk tolerances and methods for determining their prices. Some lenders offer better rates and focus on deals with lower LTV and lower risk. Some lenders, on the other hand, are willing to take on riskier projects and adjust their loan rates accordingly.
This is where HotelLoans.Net’s extensive network of over 200 private lenders and real estate investors comes in handy. Because we work with numerous lenders, we can find the best loan rates for you by matching your project with the lender whose terms best align with your needs and risk tolerance. As both correspondent and table lenders, we can create and fund loans in-house. We also have the freedom to broker deals to our extensive network of lenders, which makes the process go more smoothly and get better terms.
Additionally, note that the interest rate isn’t the only factor that influences the cost of a hard money loan. There are also points and startup fees that come with most hard money loans. Points are fees that the lender charges up front. They typically range from 1% to 5% of the loan amount. Origination fees cover the costs of processing the loan. People think the price is “high” because of these fees, but they are normal in hard money loans. They are part of the lender’s overall strategy for generating revenue. Understanding these additional costs is essential for obtaining a comprehensive understanding of the loan’s total expenses.
Factor 5: Property & Project Risk: Influencing Your Hard Money Loan Rates
The interest rates for hard money loans depend on several factors, including the type of hotel property and the overall complexity and size of the project. In the eyes of a money investor, different types of property naturally carry different amounts of risk.
For example, a simple “fix and flip” of an existing single-family home into a short-term rental that only requires minor cosmetic updates usually has a lower risk profile. There are limits to what can be fixed up, and this type of property is appealing to a wide range of buyers. A complex ground-up building loan for a new, multi-story hotel investment property, on the other hand, entails a significantly higher level of project risk. There are more unknowns, more extended deadlines, and a higher chance of problems and cost increases that were not planned for. Lenders will add this high risk to the interest rate.
Additionally, specialized properties such as theme parks or niche resorts may have a smaller pool of potential buyers if the project were to go bankrupt. Private investors perceive more risk when liquidity is scarce, which can result in higher interest rates on hard money loans. Lenders will carefully assess a property’s investment prospects and marketability, which will influence their pricing. The more unique or niche the property, the more lenders will look at it. The interest rate on hard money loans increases as the repair or building project becomes larger and more complex. This is because there is more risk involved.
Why Choose HotelLoans.Net for Your Hospitality Real Estate Financing
When it comes to financing hospitality real estate, it’s essential to work with a company that has extensive experience and a robust network of contacts. We at HotelLoans.Net have been writing loans for 30 years, so we truly understand the needs of the hospitality business. We give benefits that can’t be beat because we are both correspondent lenders and table lenders. For fast cash, you can get direct access to capital. To find the best money loan rates, you can also use our extensive network of over 200 real estate buyers and private lenders.
As you buy land and start building your hotel investment property, as well as as you plan your “fix and flip,” “fix and hold,” and “fix and rent” strategies, we can give you full financial advice and help you find financing options. We don’t just lend hard money; we offer a wide range of loan options. There are many types of loans, including term loans, no-doc and lite-doc options, state income loans, FHA construction-to-permanent loans, USDA B&I loans, SBA loans, FHA commercial property investment loans, and more. This means we can help you secure a loan that suits your needs.
Are you ready to explore your loan options for purchasing an investment property? Get in touch with HotelLoans.Net right away to set up a one-on-one meeting! We also offer both exclusive and non-exclusive referral programs for traders who wish to partner with us in a strong way to finance hospitality real estate.
Conclusion
Before you buy hotel property, you should know how hard money loan interest rates work and how they change over time. 5 The main factors that affect these rates are the Loan-to-Value (LTV) ratio and collateral, the loan term and a clear exit strategy, your experience as a borrower and financial situation, current market conditions, the lender’s rules, and finally, the type of property and the size of the project.
Real estate buyers can make informed decisions when they understand the factors that affect them, even though hard money loans operate differently than traditional loans. Think about the good things about hard money loans that more than make up for their “higher interest rate.” For example, they can be quick and flexible, which is crucial if you want to ensure your real estate business succeeds and capitalize on opportunities that disappear quickly.
You can count on HotelLoans.Net to help you find the best loan rates for your next project and figure out how to make deals in the complicated world of hotel real estate.
FAQs
Do hard money loans for hospitality properties require an appraisal?
Even though hard money loans are based on the value of the property, many lenders, especially institutional ones, still require an evaluation or a Broker’s Price Opinion (BPO) to get a good idea of the property’s current or post-repair value. This lowers the risk for the lender and makes sure that the collateral is strong enough to protect the loan amount. Private investors can conduct their research, which may include visiting properties and studying the market. Still, a formal appraisal is usually the norm, especially for bigger or more complicated hospitality jobs.
Are hard money loans reported to credit bureaus?
Most of the time, hard money lenders don’t report loan activity to the three major credit bureaus (Equifax, Experian, and TransUnion). The fact that this is possible is one reason why individuals with poor credit can obtain hard money loans. But let’s say a borrower doesn’t pay back a hard money loan. In that case, it can have detrimental effects, such as possible foreclosure and court action, which can have an indirect impact on their finances and future loan eligibility.
What are the typical closing costs associated with hard money loans for hospitality properties?
Along with the interest rate, hard money loans typically have closing costs that can range from 2% to 5% or more of the loan amount. Origination fees, also known as “points,” typically range from 1% to 5% of the loan amount. Other fees that may be included are underwriting fees, document preparation fees, title insurance, escrow fees, appraisal fees, and possibly other third-party fees for inspections or environmental reports. Most of the time, these fees are paid upfront or deducted from the loan proceeds at the time of closing.
Can you obtain a hard money loan for a ground-up hotel construction project?
Yes, hard money loans can be used to build a hotel from the ground up. This is especially true for projects that require immediate funding or don’t meet the stringent requirements of traditional building loans. Even though these projects are riskier because they don’t have a current asset that makes money, hard money lenders may still consider them if the Loan-to-Cost (LTC) ratio is good, the developer has much experience, and there is a strong way to get out of the deal, like refinancing right away when the project is finished. To compensate for the higher risk, the rates and fees for these types of loans will typically be higher.
How quickly can a hard money loan for a hotel be funded?
One of the best aspects of hard money loans is their speed and ease of use. When it comes to hotels, it can take months for traditional bank loans to close. But hard money loans are often accepted and funded in just a few days or weeks. The exact timeframe relies on how well the borrower’s paperwork is organized, the complexity of the property, and the lender’s workflow. In the competitive hospitality real estate market, this quick turnaround is particularly significant for owners who want to capitalize on opportunities that can disappear quickly.
