Traditional loans are typically ideal when you’re purchasing a home for your own use. However, if you’re looking to invest in real estate properties, you may want to choose hard money loans instead. There are a number of reasons this type of loan is better for investment purposes. The following will help you determine if this type of lending is the right option for your real estate investment opportunities.
Financial Shortcomings
One of the biggest challenges individuals face when they want to invest in real estate is getting approved for the loan they need. When you go through a traditional lending process, the bank or other institution will take a close look at your financial situation and determine your ability to pay back the loan based on those factors alone. However, when you are working with hard money lenders, who are typically individuals or private corporations, they don’t have to follow the same rules and regulations banks do, which means they are more likely to give you the funding you need to make the purchase, despite your financial situation. They see these opportunities differently and understand they will receive some return on their investment.
Faster Negotiations and Closings
The real estate market can be extremely fast paced, especially if you want to take advantage of low-cost properties that are relatively easy to flip and sell for a profit or are ideal for rentals. This means you need to be able to close fast and more easily negotiate with the seller so you can get the best possible deal. In many cases, sellers are eager to move to their new home and want to complete the sale as quickly as possible. If you are able to get the funds from a hard money lender within a couple of days, you are more likely to be accepted for a sale over someone who has to wait for their bank to approve and process their loan, even if it means accepting slightly less.
Ease of Reinvestment
If you’re turning properties over on a regular basis, you need to be able to easily transfer the equity you have in one property into another. This can be a complex process but can be made easier when you’re dealing with hard money lenders over traditional lenders. If you don’t aren’t able to easily transfer the equity from one home to purchase another, you can miss great opportunities. Banks will simply look at your request as additional debt. However, hard money lenders are more likely to see the equity in a home you are about to sell and will be willing to finance the next one until the home you currently own sells.
Outside Bank Guidelines
Banks operate under a strict set of guidelines in order to determine if you qualify for a loan. This means you are much more likely to be denied for a loan, especially if you are aware you don’t meet the qualifications. Because hard money lenders are typically private corporations or individuals, they don’t have to follow these regulations and are more likely to make exceptions to the rule. They will look at your capabilities, rather than the state of your financials, giving you the funding you need without worry over whether you will be approved for a traditional loan.
Free Advice
In many cases, hard money lenders have already worked with real estate investors and know a bit about the venture themselves. Because they are just as invested in the project as you are, they are likely to share information about their experiences with you, helping you build the investments you are looking for. This can help you grow your portfolio and ensure you are as successful as possible in your real estate investments.
Faster Approval for Commercial Loans
Not everyone is dedicated solely to investing in residential properties. However, when it comes to commercial loans, traditional banks and lenders are much slower than residential loans. In fact, getting approved for a commercial property loan can take four months or longer, leaving you in limbo and potentially losing you the property you want. The good news is hard money loans are a much simpler process and are likely to be approved faster so you can get started with making money from this investment. In fact, you could have your commercial loan in as little as a week.
Less Risk of Deal Failure
Have you ever attempted to purchase a property, only to find the bank backed out of the deal while you were in the escrow stages, costing you the deal in the end? With hard money lenders, you won’t have to worry about this problem. These individuals and private companies are far less likely to base their decisions based on your current financial state, which is the most common reasons for banks to pull their funding. Instead, these non-traditional lenders are more likely to look at the value of the assets to be purchased and the collateral so they can feel confident they will get the appropriate return on their investment. This will ensure you can complete your deals and get the right properties to help you make money.
Use Leverage
Banks will typically give you the money you need for your loan in the form of a check or similar. It will take time to generate this document, which can make buyers nervous about the deal in the end. When you work with hard money lenders instead, you are more likely to have the cash in your hand when you go to the closing table. Sellers often like to receive cash because they won’t have to worry about whether that check will bounce. You can use this as leverage when you are trying to make a deal, sometimes landing a better selling price than someone who may go through a traditional lender. Hard money lending can also free up cash for those unexpected renovation projects that may come up.
Loan Approval, Even with Blemishes
If you don’t have pristine credit, it can be extremely difficult to get a traditional loan for investment properties. This is because banks take your credit history into strong consideration when approving or denying these loans. Those who are willing to invest in properties through hard money lending won’t often care about these issues as long as they are relatively minor or unrelated to real estate entirely. Instead, they will look at the value of the properties you are intending to buy so they can be sure they will get their money back.
A Customized Loan Package
Because banks are more rigid in their lending practices, you will find they aren’t as willing to work with you when putting together your loan. This means if you need additional money to make renovations to maximize your investment potential, they aren’t likely to approve it beyond the value of the property itself. However, hard money lenders will take these details into account and are likely to give you the additional funds needed to complete these projects. This is because it increases the earning potential of your investments, which benefits them as well. The end result is you can get the loans you need on your terms, giving you the opportunity to make the most of your investment.
