The average profit real estate investors made in 2021 from flipping homes was $63,500.
Would you like to make this kind of money from one project?
Flipping homes can result in large profits. In some cases you can even have the money quickly, but flipping homes requires financing.
One financing option is through hard money loans for real estate.
If you’ve never heard of these, you might wonder what they are and how they work. But, of course, you might have other questions, too.
If so, check out this guide to learn all the important things to know about hard money loans before you apply for one.
What Are the Features of Hard Money Loans for Real Estate?
Hard money loans are loans that real estate investors use to finance investment properties they purchase.
Lenders that issue these loans base the loan amounts on a property’s collateral. As a result, they consider these asset-based loans.
In most cases, these loans have the following features:
A hard money loan isn’t the type of loan you’d get to buy a house you want to live in for many years. You’d need a mortgage for that, as mortgages are long-term loans.
Hard money loans are short-term loans. The lender might require repayment within 12 to 24 months. Therefore, you only borrow the money for a short period.
Higher Interest Rate
Hard money lenders might look at the borrower’s credit before approving the loan, but they don’t use this factor as the main factor when evaluating hard money loan applications.
Instead, they use the equity in the home as the primary basis. As a result, you’ll pay a higher interest rate on the money you borrow through a hard money loan.
Loan Amount Based on Equity
The other feature to understand is that lenders base the loan amounts on the property’s equity.
Suppose you want to buy a house to flip and need a loan for it. The lender would give you up to 90% of the home’s current value. They won’t give you 100% of it or offer extra money for the renovations it needs.
You can read this to learn more about the terms and features of hard money loans.
What Can You Use Them to Buy?
Hard money loans are for real estate investments, but what types of properties can you buy with them? You can choose from many types of properties.
Most real estate investors use these loans to finance short-term projects that involve purchasing real estate to flip.
For example, you can use hard money lending to buy a run-down house that you can flip. Once you buy it and complete the work, you can sell it to repay the hard money loan.
You can do the same with apartments, duplexes, or multifamily homes. The goal is to use them for projects that you can turn quickly for profits.
How Do You Qualify for One?
So, what do hard money lenders look at when evaluating loan applications? As noted, they don’t care much about a person’s credit, so what do they want to see?
The Property’s Current Value
Lenders want to know the property’s details before issuing the loan. The main detail is the property’s current value. You may need to hire an appraiser to find this value, as it might be a requirement for the loan.
The lender might also ask for proof that you have enough cash to use for the renovations the property needs.
The Property’s Finished Value
Secondly, the lender must protect themselves by keeping their risk level as low as possible. One way to do this is by comparing the loan amount to the property’s finished value.
While you can’t know the exact amount it will be worth after renovating it, an appraiser can give you a fairly accurate estimate. Appraisers base this on comps.
Your Experience in the Real Estate Industry
Additionally, lenders might be more willing to approve a loan for you if you have experience in the real estate industry. As a result, you might face more challenges getting your first loan than subsequent loans.
How Can You Use Them Wisely?
Learning how to use hard money wisely is vital before you apply for a loan. Therefore, here are some tips to help you succeed with real estate investing while using hard money loans:
Research a Property Thoroughly Before Buying It
First, you should spend time researching the property before buying it. The purpose is to know how much money you must invest in it to update it thoroughly.
Create Your Plan Ahead of Time
Secondly, you need a plan for the project. You should write a timeline for the repairs and hire the contractors before beginning the renovations.
Find a Buyer Quickly
Finally, you must find a way to sell the property quickly. Once you finish the property, you’ll make more money if you have a buyer right away. If it takes too long to sell it, you’ll accrue more interest to pay on the loan.
Are There Alternatives to Hard Money Loans?
Most real estate investors find that qualifying for real estate investing loans is challenging. After all, you can’t use conventional loans to finance these projects.
Hard money loans tend to work well, though. You might find other options by speaking to a commercial lender. You can also consider looking for private real estate investors in your area, as some might offer financing.
Learn About Your Options for Real Estate Investing
Real estate investors often turn to hard money loans for real estate transactions because they’re ideal for flipping houses. But, they’re also great for other investment projects.
Using a hard money loan provides a way to finance your project, which means you’ll have a way to start making money on real estate.
Would you like to learn more about these loans? If so, contact us at Stonecrest Financial. We specialize in commercial loans and can help you find the right loan for your real estate project.