What Should You Expect from Hard Money Loans in Property Investing?
The main disadvantage of hard money loans is its higher cost; that is why they call it as hard money.
Lenders always incur more risks when they approve the loan, and as the result they want sizable return
that risk. You should expect the following:
Do these possibilities sound scary? Perhaps, if you do not take enough time to know the deal and its
to your current investment. The profit, most hard money investors make is irrelevant; what really
your net profit. Simply factor the financing cost into your calculation, just as you would real estate
commissions or repair costs or any other costs. If you can obtain a return you are content with, does it
really matter how much a hard money lender makes on this deal? You could put together a transaction
the investor charged twelve points at fifteen percent interest! It shouldn't matter much if it is
fund, and the profit is significant. Never let the numbers or the hard money loan cost blind you to the
involved profits in the transaction. If dealing with a hard money lender necessitates you to spend
additional $10,000, but that is the only reliable way you can obtain the transaction, and you will still
make $40,000 in profit, a hard money lender can be an excellent option after all. A $40,000 profit you
make is immeasurably better than a $50,000 profit you have no real way of making.
You shouldn't overlook holding costs. An investor should have enough cash to cover the property purchase
price and renovations and repairs, the unexpected holding costs might derail your investment and perhaps
lead to your losing the property in foreclosure. Add in all costs in your calculation and make sure you
enough funds on hand including at least a ten percent buffer to cover the unexpected costs.
- Interest: Interest rates of hard money loans are naturally higher, occasionally double
going rate for regular loans. If the standard rate for the fixed-rate mortgage is seven percent,
should expect to pay between twelve and fourteen percent for the hard money loan.
- Points: Hard money lender often requires you to pay between 2 and 6 points (or perhaps
up front. A point is equal to one percent of the loan value. Therefore, for a $200,000 loan at
points, you will pay $10,000 just for the privilege of obtaining the loan.
- Loan-to-value: It is the loan ratio to the property value. A loan of $150,000 on a house
valued at $200,000 has an LTV rate of 75%. Hard money lender will typically loan only fifty
to at most seventy percent of the expected property sale price (not the initial purchase price;
final resale price). Depending on the amount you pay for the house, you may need extra funds to
cover holding costs or repairs.
- Amortization: The typical term of the loan will be about 3 to 15 years, instead of 20 or
the hard money lenders want you to quickly pay the principal down. Therefore, the monthly
will be much higher. The lenders will sometimes reduce the points or fee if the loans are paid
- Balloon payment: Rather than making equal payments throughout the term of the loan, most
money loan have balloon payments; the final payment will be the remaining balance. If the loan
amortized over ten years but use a balloon payment at the final two years, the total amount can
substantial. A hard money lender may require that your loan be paid entirely after twelve or
six months. If you want to line up additional financing in the meantime or perhaps flip the
that is not a big problem; but if you don't, you will need to have enough funds on hand.
- Pre-payment penalties: A few hard money lenders look for a predictable income flow and
stipulate a pre-payment penalty for early loan payment, so study the terms carefully.
- Closing costs: Hard money loan is closed like conventional loan. You can be demanded to
any points or fee you agree to up front, therefore make sure you make complete sense of your
responsibilities at the loan closing before you agree to obtain a loan.