Hard money loans for investment properties are shorter term, equity-based loans at higher interest rates than bank rates. Like bank loans, hard money loans are only issued with a first position mortgage lien on the property and title insurance.
Technically speaking, hard money loans are very similar to bank mortgages, but there are a few key differences to be aware of. Hard money loans can be a great tool for maximum leverage, even for people who qualify for bank mortgages.
Read on for how best to leverage hard money for investment property purchases.
What differentiates hard money loans for investment properties from normal bank mortgages?
Speed, Access, Term, and Cost.
Speed
First, hard money loans are fast. Quick closings can make all the difference in a real estate transaction. We’re here to fund quickly when you need it. Sometimes the speed is worth the cost.
Banks are notorious for taking longer than promised, and you are lucky to get them to promise a closing in 30 days or less. Typically, it’s 45 days or more for a standard lender to close a loan. Hard money loans are regularly closed within 5 business days. Yes, five.
Access
Second, hard money loans for investment properties are easier to qualify for. DTI? Most hard money lenders (including us) don’t care. DSCR? We don’t use that either. W2? No, thanks. Tax returns? No. Paystubs? Nope.
Hard money loans require very little documentation compared to a bank loan. Our short, quick application and a PFS (personal financial statement) is typically all we need. Smaller loans don’t even require the PFS. Equity in the property is our primary qualification.
Term
Third, hard money loans are shorter term. You need an exit strategy within the year. Most of our experienced borrowers pay their hard money loans off in 6-8 months, either by selling the property or refinancing with a conventional lender.
Since they are so short term, hard money loans also have the advantage of interest-only (meaning lower) payments. Our loans don’t amortize, so you only have to pay the interest and property tax each month, no principal.
Cost
Lastly, the cost of a hard money loan is generally higher than a bank mortgage. Even with excellent credit, hard money is typically more expensive than a bank loan. However, using a hard money loan in the short-term could empower you to borrow more from a conventional lender.
Sometimes the convenience is worth the cost – read on for a detailed example of how hard money loans for investment properties can maximize leverage.
Maximize your leverage: use hard money loans for investment properties.
Let’s say you get a great deal, a signed contract to purchase a central Austin house for $500k. ARV on that house after your renovation is $1M. Renovation budget is $200k.
If you buy the house with a bank loan, you can probably only borrow 90% of your $500k contract price. That’s $450k, so you’d need to contribute $50k plus closing costs and chip in another $200k for the renovation. So even if you qualify for this loan, it’s not that attractive when you look at what using a hard money loan and refinancing at the end could do for you.
Contract price vs appraised value: a key financing detail.
Here’s how a hard money loan for investment property can drastically change your ability to leverage.
A hard money loan would enable you to borrow $700k, 70% of the $1M ARV at the time of purchase. That’s the full contract amount and budget in this example. You’d need some cash to get started since the hard money lender will release the construction funds based on physical progress, and you would also need to pay the closing costs, plus have some reserves for those interest payments.
Once the remodel is complete, and after sufficient seasoning (4-12 months of ownership), you can refinance with a bank for 90% of the appraised value. After seasoning, they will look at your property’s appraised value rather than the contract price – a key difference. If appraised value is $1M, then they could lend you $900k and you would pocket cash on the deal.
In this example, using a hard money loan to purchase the property makes the difference between a bank offering to lend $450k on a $700k project, about 64%, or $900k, ~128% of the project cost.
Leveraging hard money loans for investment properties, an example.
- Contract price: $500k
- ARV after-repaired value: $1M
- Renovation budget: $200k
Bank loan at purchase ties up $250k+.
- Banks will only lend up to 90% of your contract price on investment property, $450k.
- Maximum cash-out from bank on a purchase loan is typically $0.
- Cash to close with $450k loan is over $250k. $50K down payment, plus closing costs, plus $200k renovation funding.
- Loan offer is only ~64% of the project cost (LTC).
Hard money lender requires just the closing costs and a runway for the remodel.
- Hard money lender’s max loan at purchase, 70% of ARV: $700k.
- Cash needed with $700k hard money loan: $0 down payment, although you will need to pay your closing costs, and you’ll need some funds to get the renovation started.
- Hard money loan offer is 100% of cost (LTC).
Post-remodel refinancing with a bank.
- Bank loan offer after renovation and 3-12 months of ownership (seasoning): $900k, 90% of appraised value.
- Possible cash-out from bank refinance loan after renovation: $200k.
- Refi loan could be for up to ~128% of the project cost.
In this example, a hard money loan makes the difference between contributing $250k cash to a deal, or cashing out up to ~$200k from the deal, a $450k swing in cash available. That’s quite a leverage advantage for paying just a few months of higher interest on the hard money loan.
Contact us to learn more about how to incorporate hard money loans into your real estate investment strategy. We’re more than happy to work with your refi lender to make sure your payoff loan is a smooth transition. Quick, painless closings are our specialty.