You’re considering purchasing a hotel as an investment. You have a well-thought-out strategy, but securing cash appears unlikely. On the one hand, traditional banks are cumbersome and rule-bound, with a closing time that can take 30 to 50 days.
What is the fastest way to get the money you need? As an alternative, hard money lending has been on the rise. A 2024 analysis of the lending market found that hard money loans often have interest rates ranging from 10% to 18%, reflecting their higher-risk, faster-turnaround nature.
In this post, we’ll explore the role of hard money lenders for first-time investors and how they can assist novice real estate investors.
We will explain what hard money kenders loans are, how they operate, the benefits and drawbacks of these loans, and where to locate trustworthy private lenders.
What is a Hard Money Loan?
A hard money loan is a short-term loan based on collateral. In other words, the loan is backed by the rental property, not your credit score. In a sense, the land is collateral, which means it protects the lender.
A hard money investor for real estate differs from traditional banks in that they don’t consider your personal credit history, income, or debt-to-income ratio. Instead, they care only about how much the property could be worth. They determine the property’s after-repair value (ARV) and its potential return on investment, which speeds up the process and gives you more options. The fact that the lender is more interested in the asset than in the borrower’s credit history makes hard money loans easy to get for new owners who may not have perfect credit or a long history of buying and selling real estate.
How Do Hard Money Loans Work?
Process: The process is simple and, most importantly, fast. You find an investment property, submit a streamlined application to a hard money lender, and if approved, you can often close in a matter of days rather than the weeks or months it takes with a traditional bank. This speed is a critical advantage in competitive real estate markets where a great deal can disappear in a flash.
Loan-to-Value (LTV) Ratio: The Loan-to-Value (LTV) ratio is a key factor. Hard money lenders for real estate typically calculate this ratio based on the property’s After-Repair Value (ARV), which is the estimated value of the property after all planned renovations are completed. Lenders may offer to finance a percentage of this ARV, often ranging from 65% to 75%. For example, if you find a property for $150,000 and plan to put $50,000 in repairs to bring its value up to $250,000, a lender might offer you a loan of 70% of the ARV, which would be $175,000. This allows you to borrow more than the property’s current value, a feature essential for “fix-and-flip” investors.
Loan Terms: Hard money loan terms are intentionally short, typically ranging from 6 to 24 months. Interest rates are significantly higher than with a traditional mortgage, often between 8% to 15% or more. This is because the loan is considered higher risk and is designed to be a temporary solution until the property is sold or refinanced with a traditional mortgage.
Why Hard Money Lenders for First-Time Investors Are Perfect
Speed is Everything: In the competitive world of real estate, the best deals often go to the fastest buyers. Traditional banks can take 30 to 60 days to process a loan. This timeline will likely cause you to lose out on a promising property. Hard money lenders, however, can approve and fund a loan in a matter of days—sometimes as few as 72 hours—allowing you to move with the speed of a cash buyer and secure a lucrative opportunity before anyone else.
Less Strict Requirements: As a first-time investor, you may not have a long credit history or a perfect financial track record. This is where hard money lending shines. Unlike traditional lenders who scrutinize your credit score and debt-to-income ratio, hard money lenders focus primarily on the value of the asset you are using as collateral. This makes them a viable and often preferred option for new investors who might not qualify for conventional financing.
Focus on the Property: A hard money lender for real estate isn’t just a source of funds; they are your partner in the deal. Because the property secures their loan, they have a vested interest in the project’s success. Their expertise in evaluating a property’s potential value and market viability can be a valuable resource for a new investor. This collaborative relationship can provide you with guidance and confidence as you embark on your first real estate investment.
The Ideal Scenarios for Using Hard Money Lenders for First-Time Investors
Fix and Flip Projects: This is the most common use of hard money loans. A fix-and-flip strategy involves purchasing a distressed or undervalued property, renovating it, and then selling it for a profit. Hard money loans provide the perfect vehicle for this strategy, as they offer the capital to buy the property and often include funds for the necessary repairs. The short-term nature of the loan aligns perfectly with the goal of a quick turnaround, and the lender’s focus on the property’s potential value makes it accessible for first-time flippers.
Bridge Loans: Hard money loans can also act as “bridge” loans. This is especially useful for investors who need to finance a new property but are still waiting for their current property to sell. A hard money loan bridges this financial gap, allowing you to secure the new investment without the pressure of a quick sale on the old one. Once the first property sells, you use the proceeds to pay off the hard money loan.
Rental Property: While hard money loans are typically short-term, they can be a great starting point for a buy-and-hold rental property strategy. An investor can use a hard money loan to acquire a rental property that may need renovations quickly. Once the repairs are complete and the property is stabilized and generating income, the investor can then refinance the hard money loan into a traditional, long-term mortgage with a lower interest rate. This strategy is often referred to as the “BRRRR” method: Buy, Rehab, Rent, Refinance, Repeat.
Key Factors to Consider When Choosing Hard Money Lenders for First-Time Investors
Rates and Terms: It’s critical to compare not only the interest rate but also the other costs and terms associated with the loan. Hard money loans often have a higher interest rate, typically ranging from 8% to 15% or more. Beyond that, be sure to ask about points, which are an upfront fee equal to 1% of the loan amount, as well as any other closing costs. Some lenders also have prepayment penalties if you pay off the loan early, so it’s essential to understand the full cost of the loan before you sign any agreement.
Experience: The real estate market is complex, and a good hard money lender is more than just a money provider. Choose a private lender with a strong reputation and a history of successful projects. Ask for references from past clients and check online reviews to get a sense of their professionalism and reliability. A reputable lender will be transparent about their process and happy to share their track record.
Local Market Knowledge: While some hard money lenders operate on a national scale, a regional lender can be an invaluable asset for a first-time investor. A local hard money lender understands your market, including local real estate trends, property values, and the type of real estate you are investing in. This local expertise allows them to make faster, more informed decisions and can provide you with insights that a large, out-of-state lender may not have.
The “HotelLoans.Net” Advantage
Our Expertise: We are both a correspondent lender and a table lender, and we focus on hotel real estate. This means we can guarantee a full 30-year term, which makes us different from many hard money lenders who can only help with short-term problems. We can create and fund loans, as well as sell them to institutional investors on the secondary market. This gives us access to a broader range of loans.
Our Network: We can find the best way to get you the money you need, thanks to our extensive network of over 200 investors and private loans. We offer a range of loan options, including hard money loans for quick purchases, bridge loans for short-term financing gaps, and long-term SBA loans for a more direct approach. We make sure that our financing fits your business goals.
Our Process: We offer more than just loans; we also work with you. We offer financial advising services that can help you with every step of the process, from evaluating a possible investment property to learning about the market and getting the best loan terms. We use our knowledge to help you make wise choices and give you the tools and support you need to be successful in your real estate business journey.
Conclusion
It’s beneficial for new investors to get a hard money loan. It gives you speed and flexibility that traditional banks just can’t match. This lets you take advantage of opportunities that are time-sensitive and get into the market without having to follow the strict rules of traditional lenders. Hard money loans are ideal for “fix-and-flip” projects, bridge financing, and purchasing a rental property for the first time, despite the higher interest rates and shorter terms, which may seem intimidating. Lenders of hard money look at the potential of the product instead of your credit score, which means that first-time investors can compete with experienced ones.
Are you ready to start investing in real estate, but don’t know how to get the money you need? Get in touch with HotelLoans.Net right away for a free chat. Whether you need a hard money loan or a long-term loan, we’ll help you find the best way to get the money you need for your next job. We can help you make your business property dreams come true with our knowledge and extensive network.
FAQs
1. What is the difference between a hard money loan and a private money loan?
While the terms are often used interchangeably, there is a key difference. Hard money loans are typically provided by a professional lending company or group that specializes in asset-based loans. Private money loans, on the other hand, are usually sourced from an individual, like a family member, friend, or business associate. Hard money loans often have more standardized terms and a formal process. In contrast, private money loans can be more flexible and relationship-based.
2. Is a hard money loan an option for a primary residence?
No, hard money loans are typically not used for a primary residence. Due to federal regulations like the Dodd-Frank Act, hard money lenders avoid lending on consumer-purpose or owner-occupied properties. Hard money loans are almost exclusively used for business or investment properties, such as fix-and-flips, rentals, or commercial buildings.
3. What is an exit strategy for a hard money loan?
An “exit strategy” is the plan to repay the short-term hard money loan. The most common exit strategies are:
- Selling the property: The investor sells the renovated property and uses the proceeds to pay off the loan.
- Refinancing: The investor refinances the hard money loan into a long-term, traditional mortgage once the property has been renovated and its value has increased.
- Using personal funds: The investor uses other assets or capital to pay off the loan.
4. What kind of collateral is required for a hard money loan?
The primary collateral for a hard money loan is the real estate investment property itself. The loan amount is determined by the property’s value, particularly its After-Repair Value (ARV). The lender’s primary security is the property, which they can seize if the borrower defaults on the loan, making it less risky for them than a conventional loan.
5. Can I use a hard money loan to buy land?
Yes, a hard money loan can be used to purchase land, including raw, undeveloped, or improved lots. This is a common strategy for developers or investors who need to quickly acquire a parcel of land to hold, develop, or build on. Since conventional banks are often hesitant to finance land purchases, a hard money loan’s speed and asset-based focus make it an ideal solution.
