Photo by Emily Chavez Photography
There are many different loan types to choose from when financing real estate; Conventional, FHA, USDA, etc. Here are 3 reasons why people use hard money loans when investing in real estate, and why you might want to consider it!
1) You get money FAST
Using hard money allows you to close on a property FAST – sometimes in as little as 1 business day.
Why does this matter? If a motivated seller has multiple offers on a property, which offer are they more likely to accept? The offer that is 30-45 days out, with a lot of hurdles to jump through and the deal has a decent chance of falling apart, OR the offer that can close within 3 business days, like cash, no appraisal is required, and a lot more likely to close on time?
Speed will make your offer more competitive and help you win deals.
Practical tip: You need to find a hard money lender that won’t just tell you what you want to hear. You need to find a hard money lender that does what they said they were going to do. Find a lender that is transparent, informative, and that you feel you can establish a relationship with.
2) You get money EASIER
Because hard money lenders mainly qualify you mainly based on the value of the collateral and the project, there is a lot less underwriting and documentation required (typically no tax returns, paystubs, bank statements, etc). Additionally, there may be factors that affect your ability to get conventional financing (credit, income, source of funds). A hard money lender is going to be more flexible due to the property collateral being their primary factor in considering the loan.
Practical Tip: You do want a loan without a lot of hurdles, however you also want a lender that performs due diligence. They should still be looking into your exit strategy and ability to repay the loan. It is always helpful to have a second opinion in helping you evaluate the project and identify any potential pitfalls. If a lender is not doing this for you, beware! Predatory lenders do exist where they might want your project to fail, and make a bigger profit for themselves through foreclosure.
3) You can profit MORE
Using hard money as leverage is a big deal for a couple reasons:
- It helps you profit more!
- Suppose you had $150,000. If you bought a $100,000 property with cash, put $15,000 to fix it up, and then listed it, sold it for $150,000 – you might make $20,000 (after you consider closing costs, holding costs like taxes, insurance, etc).
- If you instead used that $150,000 and a hard money lender to purchase three different properties for $100,000 (you have $60,000 in for the down payment for both properties). If you sold all of those for $150,000 like scenario A, you would make less profit on a single house in comparison to scenario A (due to loan costs). Instead of $20,000, maybe you make $15,000 per property. You have just made $45,000 with the same amount of cash available. Your ROI and total net profit goes way up with some leverage.
Using hard money as leverage can help you profit more!
- You had to use less money – meaning you have more cash available if needed for emergencies, OR can put it into other projects.
- It keeps your cash available. By utilizing financing for your project, you have more cash available if another great opportunity comes along, OR have more cash available if needed to finish existing projects.
Practical Tip: While leverage is important and valuable, it’s important to find that sweet spot where you don’t become over leveraged. Speed is key in real estate projects and you always want to make sure you have enough cash available to finish out your projects (plus an additional amount set aside for emergencies, or those unforeseen expense or repairs that can pop up).
So why wouldn’t people use hard money loans for every transaction?
Hard money loans take on increased risk, and as a result they have higher interest rates. As shown above, sometimes this additional cost is worth it (or can be utilized as a bridge loan, where you have the hard money loan temporarily while lining up your long term, lower rate financing). Just make sure you are aware of the costs involved, and how that impacts your bottom line before closing on a hard money loan.
Did you know that we provide hard money loans on all of these types of transactions?
Fix and Flips
Airbnb / VRBO / Vacation Rentals (including a cool cash out hack!)
We’d like to be YOUR private money lender. Schedule an appointment to talk with me!
Klinkloans Fund is a part of the Private Lending Division of Stewardship Mortgage. Klinkloans Fund is a private money lender that provides trustworthy and reliable real estate financing and service to help real estate investors achieve their goals.