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Why You Should Use Hard Money Loans to Finance Investment Property

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Why You Should Use Hard Money Loans to Finance Investment Property

Today’s real estate markets of California are growing quickly and hard money loans are frequently used to finance investment property. What you want to look for when choosing a hard money lender is experience, communication, fast processing, adequate capital, and flexibility.

A hard money loan is simply a short-term loan secured by real estate. Unlike conventional lenders, the loans are funded by private investors. The terms are usually around 12 months, but the loan term can be extended to longer terms of 2-5 years. The loan requires monthly payments of only interest or interest and some principal with a balloon payment at the end of the term.

Why should you use a hard money loan to finance investment property? The advantage of a hard money lender is they may loan the entire amount of money you require in order to complete a deal. Most hard money-lenders base the amount of the loan on the after repaired value or ARV.

InvestFourMore explains how hard money loans are typically structured:

“Here is an example of how one hard money-lender structures a deal. You buy a home for $60,000, the ARV is $130,000 and the lender says they will go up to 70 percent ARV on the property. The hard money-lender will loan up to $91,000 on the house based on the ARV. The hard money-lender will need bids or estimates for repairs, and they will pay out the money for the repairs like a construction loan. They will pay 25% of the repairs needed at closing, and the other payment will come in 25 percent increments as the repairs are completed. The lender won’t charge you any interest or points until you sell the home and then you pay them one large payment for the loan principal, interest and points. This particular hard money-lender charges 15% interest and 4 points, but they will reduce the points paid after you do a few deals with them.

The cost to do this deal with a hard money-lender can add up very quickly. On this deal, the interest will cost you $6,825, and the points will cost you $3,640 if you use the money for 6 months. There are also hard money-lenders that will charge lower interest and points, but will want a split of your profits. I don’t use hard money-lenders myself, because of how much they charge, but for investors who have no other options it can work out well. Hard money-lenders can help you secure a property below market value when you do not have other options.”

Hard money lending is becoming popular in California as many borrowers have found the conventional lenders such as banks to be too strict with their rules and regulations. Many choose to finance investment property with hard money loans because these lenders have less rules and regulations than banks do which makes it easier for borrowers to get the money they need for their investments and projects. In addition to being more lenient, hard money lenders are also much faster and processing can be done in a matter of days so you can start investing and stop waiting around.

These are the key aspects to remember when choosing a hard money lender according to Bigger Pockets:

#1. Funds availability of that Lender – you don’t want to be held up by slow funding or even too short a time period allowed by that Lender.

#2. Reasonable Terms and Finance Rates – compare them with other Lenders. Hard Money generally averages 10-12% interest only with no upfront fees.

#3. Good References from Other Clients – testimonials [or lack of] on a website or Yelp or Google+ can really tell you a lot about a particular Lender or company.

#4. Licensed, Bonded and Insured – there are numerous regulations and insurances that a hard money Lender is required to follow, all for your safety.

Today’s real estate markets of California are growing quickly and hard money loans are frequently used to finance investment property. What you want to look for when choosing a hard money lender is experience, communication, fast processing, adequate capital, and flexibility. Find out more here.

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