Hard money loans have been there in the commercial real estate loan lending market since the time real estate market took its baby steps.
These can be called the specialized financial tools which are used by savvy commercial real estate investors.
Amateur investors often do not love the idea of financing their commercial real estate property using a hard money loan due to their inhibitions regarding hard money loans.
If you ask a veteran real estate investor about the decision of using hard money loans, you’ll probably learn that using hard money loans is not at all as dangerous as it’s been portrayed to be!
The veteran real estate investors are the ones who have the knowledge about ins and outs of a commercial real estate lending market and if it’s clear that they trust hard money loans, there has to be a reason for it.
Whether you need or don’t need a hard money loan largely depends on the purpose of your loan.
Knowing the pros and cons of hard money loans for the Commercial real estate will help you make better decisions and help you in analyzing whether or not you need a hard money loan.
Here’s the overview of pros and cons of hard money loans for the commercial real estate. Read on!
Benefits of using hard money loans for commercial real estate
1) Hard money loans are funded and approved rocket speed!
One of the biggest advantages of raising a hard money loan is the speed at which these loans can be processed. Sometimes hard money loans can be processed within one day.
That’s pretty shocking to the amateur investors who’ve not had much experience with hard money loans.
The hard money lender is going to consider the valuation of the property, the amount of money the investor is going to raise as part of his equity, the down payment, the exit strategy for the lender in case the borrower defaults in loan payments and some other basic requirements.
In most cases, lenders approve the loans very quickly looking at the above factors alone and will process the loan even quicker.
Real estate investors who have never used hard money loans will be amazed at how quickly these loans can be processed as compared to the traditional loans lent by the conventional banks or other conventional lending institutions.
In most cases, hard money loans take only about 3 to 5 days for processing. This is the reason it is said that when banks and conventional lending Institutions turn down on you, you look out for private money lenders lending hard money loans.
Hard money loans are also the best solution for the investors who have been turned down by their lenders in the last moment.
Thus, hard money loans can be regarded as a rescue loan which helps investors fund their real estate properties in desperate times and especially in the cases of emergency.
2) Hard money loans are the ‘Go-To’ loans for instances where funding cannot be provided elsewhere
Private money lenders who lend hard money loans provide such loans to the investors on the type of projects in which banks and other conventional lending institutions have no interest to provide help.
The best example of this is the ‘Fix and Flip Projects’. Fix and Flip Projects are the real estate projects where investors buy a property used a short-term hard money loan to make repairs and renovations to the building with the intention of selling it off within a year, thus making good profits in the process.
Banks and other conventional lending Institutions do not entertain such fix and flip projects and that is exactly where commercial hard money loans come into picture helping thousands of investors to make good money out of such transactions.
This was just one example. There are many such instances where banks have no interest in lending and that are where hard money loans help investors.
In cases where investors need a very short-term loan say, 12 months, banks and conventional lending Institutions back out since it does not work for their business model and they are rather much interested in lending loans for longer periods of time even at the cost of charging cheaper rates of interest.
Thus, in case you need a short-term loan, hard money loans are definitely a great option.
3) Hard money loans have fewer requirements in comparison to the traditional loans
Hard money loans do not have a lengthy list of loan eligibility requirements and, in most cases, a hard money loan lender will be able to approve and also finance the loan within a very short period of time successfully.
Banks, on the other hand, have a huge list of loan eligibility requirements which are not always easy on part of the loan borrower.
Hard money lenders look out only for few basic requirements like the percentage of equity the borrower has in the property, the cash on hand with the borrower that will let him make the monthly payments, a couple of exit strategies and that should be enough.
Banks not only have a lengthy list of loan eligibility requirements but also take a long time to even approve the loan request of the borrower.
Having a great credit score is one of the primary loan eligibility requirements which most banks demand.
Besides, banks and traditional lending institutions also have a list of issues which amounts to rising of a red flag preventing banks to even begin to consider the borrower’s loan request.
Some examples of such issues can be short sales, bankruptcies and loan modifications. Banks also turn down the loan approval request of investors who already have more than 4 mortgages which aren’t cleared.
There is an endless list of such limitations and restrictions which are non-existent in case of hard money loans, thus making them the ‘Go-To’ loan in many circumstances!
Disadvantages of hard money loans for real estate
1) Rates of interest on hard money loans are always higher than that of conventional bank loans
The rates of interest charged by private money lenders for providing hard money loans are always higher than the rate charged by the conventional banks.
The reason behind charging high rates of interest is the risk factor taken by the private money lender and the factor of convenience that is available for the borrower to access immediate capital during desperate times and times where banks do not provide funding.
Besides the high rates of interest, many private money lenders also levy an extra charge which will be a percentage of the loan amount called ‘Points’.
Points are required to be paid prior to the repayment of first loan installment. Lenders charge variable points depending on the purpose for which loan is needed, usually ranging from 2 to 4 points.
2) Hard money loans need a down payment of at least 25% of the value of the property
Given the fact that the hard money lenders look past many shortcomings and issues, they require the borrower to have made at least 20 to 25% payment as the down payment for the property which’ll, in turn, mitigate the risks of private money lenders.
As the name suggests, ‘Hard money’ loans are given on the basis of ‘Hard’ asset to secure the loan while the banks require a decent credit score, good loan repayment history, regular income flow and so on.
Investors who cannot bear the 20 to 25% down payment cannot hope to raise a hard money loan because almost all private money lenders will back out from providing hard loans which have less than 25% equity in the property invested by the borrower.
3) Hard money loans are only used for short terms
Hard money loans usually have the term of the loan restricted to 1 to 2 years and not more than that.
The longer the term of the loan, the higher the risk it is for the private money lender and thus, private money lenders restrict themselves from providing hard money loans with long terms.
Thus, if you’re an investor looking for loans for use for long-term, raising hard money loans may not be the best solution for you.
Those were some of the pros and cons of hard money loans for commercial real estate. The best way to figure out whether or not to finance a particular kind of loan is by seeking the help of an expert.
You may incur some expense in relation to taking expert advice but it will be worth it as ‘Nothing beats experience!’.
However, one of the major reasons that keep investors away from using hard money loans is the fear of getting into trouble due to fraudulent private money lenders.
It is not a lie that there are fraudulent lenders out in the market but there are various ways that’ll guide you in choosing the best hard money lender.
With that problem solved, it can be concluded that hard money loans really are an amazing ‘Go-To’ option at desperate times and at times where all other lending platforms leave no hopes for financing!