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Becoming a real estate investor is a lucrative opportunity, especially if you invest in rental properties. Unfortunately, many potential investors don’t know where to look for funding. You may consider traditional mortgages only to find they don’t fit your needs, especially when you need financing fast to allow you to turn a profit as quickly as possible.
Whether you’re fixing up a rental or purchasing one ready to rent, you need a way to finance the property, especially if traditional lenders have turned you down. When looking for ways to fund your investment, you have many rental loan options, including hard money loans. Hard money loans for rental properties can allow you to easily purchase property to diversify your portfolio, and they have their benefits over other funding options.
Hard money loans for rental properties can help you secure the cash you need to start turning a profit as soon as possible, but what are hard money loans for rentals, and how can they benefit you? Keep reading to learn more.
What is a hard money loan?
A hard money loan is a type of asset-based loan secured by collateral. When using hard money loans for rental properties, the collateral or assets are the real estate property you’re investing in. Therefore, if you don’t pay back the loan according to the terms, you’ll forfeit the property to the lender for them to recoup their losses.
Hard money rental loans are short-term non-conforming loans used solely to purchase commercial or investment properties. They don’t come from traditional lenders like mortgage lenders or banks. Instead, they’re offered by private hard money lenders that accept the property as collateral.
Investors typically turn to hard money loans after having their mortgage application denied to avoid lengthy mortgage approval processes. Like a traditional mortgage loan, hard money loans are secured and guaranteed by the purchased property. However, hard money loans have less strict requirements and faster approval processes, unlike traditional mortgages.
In addition, what makes hard money loans for rental properties different from other loans is that the approval doesn’t hinge upon a borrower’s creditworthiness. Instead, hard money lenders for rental properties use the value of the purchased property to determine whether or not to approve a borrower for the loan because if the borrower defaults on the loan, the lender can always sell the property.
Hard money loan benefits
There are several benefits to using hard money loans for rental property.
- Faster funding: These loans offer a faster loan application process and less stringent criteria to make it easier to get approved fast. Faster funding can help rental property investors stick to strict schedules and start renting units faster to allow faster time to profit.
- Flexible terms: Compared to traditional mortgages, hard money loans have more favorable and flexible terms. Since hard money lenders aren’t banks, you may have room to negotiate. For example, Source Capital looks at every loan application on a case-by-case basis to work with you to determine whether you’re eligible for the loan. In addition, by working on a more personal level with a lender, you may be able to negotiate repayment terms based on when you’ll be able to turn a profit on your rental property.
- Convenient: Hard money loans for rental properties are more convenient and less time-consuming than traditional mortgages. The application takes less time, and the underwriting process is much shorter. It can take months to close on a mortgage loan, but hard money loans typically close in a few weeks at most.
- Lower credit scores accepted: While hard money lenders look at credit scores to ensure borrowers will be able to repay the loan, credit scores are less of a factor. Instead, hard money loans are based on the value of the real estate deal.
- Collateral: The collateral for hard money loans for rental property is the property itself, but some lenders may be more flexible, allowing you to secure the loan using personal assets like residential properties.
- Little down payment: Many hard money loans for rentals require little to no down payment, focusing on the property’s value instead. However, the down payment requirement varies from lender to lender, and some lenders may require a higher down payment, depending on the value of the property.
- Higher loan amount: Rental properties aren’t cheap, and depending on your credit score, you may not qualify for a loan from a bank. Hard money lenders for rental properties offer loan amounts that are higher than traditional lenders, which can help you pay up to 100% of the property’s purchase price.
All loans for rental properties have pros and cons. However, hard money loans are typically more attractive to investors because they have few disadvantages.
The most significant disadvantage of a hard money loan for rental property is that they have higher interest rates than conventional loans because hard money lenders for rental properties take on more risk. Additionally, because they’re short-term loans, they have a shorter repayment period, so they’re typically best for investors who can make a quick profit.
Hard money lenders for rental properties
Hard money lenders for rental properties approve the loan based on the property’s value, allowing the process to be faster than traditional loans so you can get your money in a few days instead of a few months. But, of course, this means more risk for the lender, so you can expect higher interest rates and shorter repayment periods.
Ultimately, funding speed, interest rates, and loan terms vary between lenders and depend on the deal. Your particular needs will determine the type of terms you can expect, so you should do your research to find the best interest rates with each lender.
When looking for a quality hard money lender, there are a few things to consider, including:
- Reliability: Unfortunately, anyone can call themselves a hard money lender if they have lending capital. Therefore, it’s important to do your research to determine whether you’re working with an individual or company you can trust. Review the online reviews of possible lenders to know what to expect. In addition, if you can contact someone who has worked with the lender before, you can learn about their positive or negative experiences.
- Speed of funding: Funding speed may be important, depending on your project. Some rental property purchasers need funding fast, depending on their project timelines. Hard money lenders will typically tell you how fast they can fund your loan once you’re approved, so feel free to ask them or search their websites for an answer.
- Interest rates: Loan interest rates vary depending on lender and loan type, so you’ll need to discuss potential rates with different companies or individuals to learn about your options. Since interest rates could impact the profitability of your project, they’re an important deciding factor.
- Terms: Hard money lenders also have varying loan terms, with some offering longer terms than others. The best thing you can do is find a lender who will match your needs. Luckily, most lenders are flexible, so you can give them a call to discuss your needs and see if your terms are possible.
Once you’ve found a hard money lender for your rental property purchase, you can typically apply online and get approved within 24 hours. Your loan will then be funded in a few days.
Hard money loan requirements
Getting a hard money loan is much simpler than other types of rental property loans. Since lenders gauge the borrower’s potential to repay the loan in time, they’ll look at the property’s value and what it will rent for instead of other requirements.
Hard money lenders must determine the deal’s profitability to approve you for the loan instead of focusing solely on the collateral and your credit history. Lenders will still vet you by reviewing your creditworthiness, but the most important part of the deal to them is the project. Since there are no requirements that are the same across lenders, most lenders look at each application individually to determine whether or not to approve a borrower for the loan.
Applying for hard money loans
Hard money loans can be a better alternative to traditional mortgages if you want fast, flexible funding. Every hard money lender for rental properties is different, so it’s important to do your research to find the best one to suit your needs.
Source Capital makes it easy to apply for a hard money loan. You can apply online in as little as ten minutes. Then, we’ll let you know if you’re approved within 24 hours, and you can expect your loan to be funded in a matter of days, not weeks. We offer fast approvals and have a proven track record of delivering on our promises.
Wondering if a hard money loan is right for your next rental property purchase? Contact us today to learn about our loan offerings. We can help you determine if we’re the right partner for your next real estate investor.