In 2021, the number of home flips rose from 257,091 to 334,000 homes, a 26% increase from 2020. This is thanks to the increasing cost of houses which was like catnip to flippers who capitalized on the demand. This resulted in the highest number of single-family home flips since 2006.
More flippers were using cash to purchase properties in 2021. However, you’ve another option - hard money loans. Want to learn more about hard money loans?
What Is a Hard Money Loan?
A hard money loan is a short-term loan secured by real estate collateral. The asset-based loan is usually given to real estate investors and companies. Considered as a short-term bridge loan, it‘s usually taken out for a short time as a way of raising money quickly. This is because a hard money loan relies on collateral rather than the creditworthiness of the borrower.
Hard money loans usually provide hard cash quickly. Like a conventional loan, if the borrower fails to repay the loan, the lender usually takes ownership of the collateral to recoup losses. However, unlike mortgages, hard money loans come with a less stringent approval process. This makes them ideal for real estate investors in need of purchasing property quickly to stay ahead of competitors.
How Do Hard Money Loans Work?
As aforementioned, hard money loans are usually based on the value of the property the borrower is using as collateral. Since banks do not provide hard money loans, lenders are companies or individuals who lend out money because they see value in the venture.
House flippers and real estate investors are the most common group of people that borrow hard money loans. This is because their venture is to purchase undervalued properties, renovate them and then sell the property for profit. When borrowing hard money loans, they use the property as collateral.
Due to the high risk of the venture, hard money loans attract high-interest rates. The rates range from 8% to 18% depending on the hard money lender‘s perceived risk and the property’s location. However, the high cost of the loan is offset by how fast the borrower pays off the loan. Most hard money loans are for 12 to 18 months.
When Do Hard Money Loans Make Sense?
Hard money loans make sense when you’re a wealthy investor in need of quick financing without the red tape that goes along with traditional loans. That is why wealthy real estate investors in the flipping business go for hard money loans. This is because they provide quick financing to purchase a property, renovate it and sell it for profit.
The loans also make sense when you want to close quickly. For example, you found a bank foreclosure sale or a competitive offer. With traditional loans, the lender has to check your creditworthiness and other stuff. This takes time to be approved for the loan. However, hard money loans take less than 5 hours to be approved.
The ease and speed with which you can access hard money loans allow real estate investors to make a profitable investment. As such, hard money loans are a great resource. However, hard money loans do not make sense where the real estate investor cannot realize any profits. As aforementioned, hard money loans are expensive as they attract high-interest rates. So, if the distressed property may not pay off the loan balance, then it does make sense to obtain it.
What Are Other Loan Options?
There are other ways that real estate investors can use to finance an investment property. One of those ways is borrowing money from family and friends. You can raise funds from family and friends, which you can use to purchase a distressed property, renovate it and then sell it. However, you need to be clear about all the risks involved.
Next, you can also get a second mortgage. This works if you’re a homeowner allowing you to get a home equity line of credit. Unlike a hard money loan, the interest rate of a home equity line of credit is much lower. But you’ll be putting up your home as collateral.
The costs of a hard money loan are higher than financing through family and friends or government lending programs. However, the high costs are a tradeoff for quick financing and access to capital. Also, hard money loans have less stringent requirements for approval and a flexible repayment schedule.
If you’re a real estate investor or house flipper in need of quick financing, we recommend hard money loans.