By Alex Shvayetsky, New Silver
Hard money lending is a reliable method of real estate financing without making use of traditional lenders such as banks. The funding for these loans typically comes from a group of private investors who lend their funds based on the collateral of a property, also more commonly known as asset-backed lending. When it comes to owning rental properties, many investors make use of these types of loans to finance renovations or acquire a property. Hard money loans are great for when financing is needed quickly, or when other lenders won’t approve the loan due to a variety of factors such as past financial history or bad credit.
Many of the advantages gained by using hard money loans are applicable to rental real estate investing as well. These are the greatest benefits of using hard money loans for rental projects:
Hard Money Loans for Rental Property
Rental properties don’t necessarily come cheap, and many real estate investors cannot afford to pay large sums of money upfront in one go in order to acquire one. Other than using traditional mortgages, rental investors are increasingly depending on hard money loans to fund their property purchases and even renovations, and for good reason.
Unlike banks and other lenders, hard money loans can be approved within a few days, in full, sometimes without the need for a down payment from the investor. This is because hard money lenders are not restricted by the same regulations as banking institutions are, and subsequently, their loan specifications are far less stringent.
Hard money loans are also particularly good for renovation financing, often referred to as fix and rent financing. Many of these lenders provide up to 100% renovation cost cover and typically the funds are released on an agreed-upon schedule between them and the investor.
Quick Turnaround Times
The first big benefit is the speed at which hard money lenders are able to grant loans to rental investors. Because these loans are funded by private investors, there are fewer steps involved for the investor than there would be if they were applying at a bank. This is partly because these lenders put less stock in the borrower’s credit history or debt, as the property the loan is granted for becomes collectible collateral in case of a default.
As these lenders don’t have to prescribe to the same rules as banks do, their loan applications are processed faster and they don’t need to spend as much time checking income and other financial statements before making a decision. Hard money lenders are considerably more interested in the value of the property, and whether it makes a good investment or not than in the investor’s financial background.
Banks and other traditional lenders are often hesitant to fund 100% loan amounts, preferring instead for the borrower to put down a specific amount as down payment themselves. This is for safety, as these lenders are much less likely to take on investments that they consider risky. But with hard money lenders, many do not require a down payment and will loan up to 100% of the purchase price.
This is extremely valuable to investors seeking to close a deal quickly and expand their real estate portfolios without taking on a traditional mortgage. It’s best to contact a hard money lender once a promising property has been found in a good location.
Getting A Foot In The Door
For individuals just getting started in the rental game, hard money loans can be a great way to help kickstart investment portfolios and solidify a dependable monthly income. New people entering the real estate investing game often find it extremely difficult to get together the funds to purchase their first rental property. Hard money loans allow investors to acquire these properties with little to no money needed in advance.
These loans can also cover shortfalls that come up during the rental ownership process like providing money in case of emergencies (burst pipes or other surprise fixes that may be an unwelcome surprise). Hard money lenders are also typically property experts and can provide valuable insights for less experienced investors, assisting with valuations, connections to service providers and more.
Many of the benefits to be gained from hard money loans are also great for rental properties. These loans are best suited for situations when you need fast, flexible funding. Hard money loans are similarly ideal to use for “fix and rent” situations. For secondary residences, or starting out an investment portfolio, hard money lenders should not be overlooked as a diving board into further property investment.
About the Author: Alex Shvayetsky serves as a partner at New Silver and has a 25-year track record in real estate management, property development, and investment, all of which he applies to his work as part of the New Silver private money lending team. Alex’s successful fintech and real estate experience in property management now benefits New Silver borrowers across both Massachusetts and Connecticut. Alex holds qualifications in finance, mathematics and economics from the University of Connecticut and Brandeis University.