Last Updated on: 21st May 2024, 02:30 pm
Real estate is a favored investment opportunity because of its long-term stability. If there’s one thing you can bank on consistently, people need housing. Therefore there will always be a demand that needs to be met.
Despite the numerous advantages of being a property owner, procuring a house at an affordable rate is challenging for most people. Thankfully, there are multiple funding options potential investors can utilize to get their rental business started.
Knowing what works best for you can help you select the right option. For example, do you want to know if a private money lender is better for you? Can you tell the difference between hard money and traditional loans? Stick around till the end of the article to find out the top 6 benefits of hard money loans and more.
Top 6 Benefits of Hard Money Loans
- Lower Restrictions
One of the top benefits of hard money loans is that they have lower restrictions. Many private lenders have few requirements and are eager to fund people willing to pay back at higher returns. Thus, with your necessary documentation and a good exit strategy, you can quickly get approval for your loan.
- Quicker Closing Times
Another benefit of opting for a hard money loan is that they have quicker closing times. For example, if you’re trying to purchase a home on a time-sensitive limit, a private lender with fewer restrictions could give you the necessary funds within 2 – 3 days. On the other hand, bank loans typically require at least a week of processing time, which could cost you a great deal.
- Greater Funding
Banks typically assess loan requests on the standing value of the house. So, for example, if you find an outdated building in a prime location, you might need more than one loan to make it a high-value property. However, hard money lenders consider the property’s value after renovation, allowing you access to generous funding. So if you want to avoid getting multiple loans, hard money lenders in Baltimore can help you fund your investment plans.
- More Flexibility
A hard money loan could be the perfect solution if you like calling the shots. Private lenders have fewer board-approved restrictions and can alter their loan terms based on external factors that vary from one borrower to the next. Hence, it could be an excellent opportunity for you to leverage your negotiation skills and secure a better deal.
- Multiple Project Funding
Establishing a relationship with a reliable money lender could give you the added perk of managing multiple projects. If you’re the type that likes to multitask, you could apply for various loans to fund different projects and improve your profit margin quickly.
- Collateral Backing
Lastly, hard money loans have the perk of using the property as collateral. In other words, you don’t need to declare bankruptcy if you can’t repay. But you will have to relinquish all rights to the property. Thankfully this will absolve you from having to pay back the capital.
Difference between Hard Money Loan vs. Traditional Loan
- Funding Source
The primary difference between hard money and traditional loans is the funding source. While the former depends on private investors, lenders, and other funds, the latter uses money from a pool for high-risk ventures. Consequently, traditional or bank loans typically have more restrictions guiding them to avoid losing investors’ money.
Thus, funding forms the basis for the differences in how private lenders and bankers structure and approve loans.
- Time Limit
Another fundamental difference between hard money and traditional loans is the time limit. As highlighted in the previous point, funding sources can trickle down to how investors or bankers structure their loans.
Since banks have more backing, they can afford to extend borrowers long-term loans of up to 15 years. On the other hand, private investors are more interested in short-term profits, and their loans are also short-term with high-interest rates. Thus, missing your payment schedule can be a setback for some investors, especially if there are high late fees. That’s why choosing the right hard money lender for the best deals is essential.
- Eligibility Requirements
Traditional loans with many guidelines regarding money lending are often more likely to reject proposals, especially from small businesses, entrepreneurs, and first-time homebuyers who are more high-risk borrowers.
Conversely, hard money lenders are in it for profit and are less likely to reject a proposal unless an applicant is grossly unfit. So even with a bad credit history, you can secure a hard money loan quickly.
- Loan Terms and Estimations
Finally, traditional loans and bank loans differ in their loan terms and estimations. For example, banks are more likely to offer borrowers long-term loans with low interest. However, they usually use a loan-to-value metric to estimate how much they can approve.
Traditional loans may have a ticking repayment schedule. Still, they are more willing to use an after-repair metric which allows you to borrow against your potential revenue after completing a renovation.
Conclusion
In summary, hard money loans are a great alternative to traditional loans for investors that want more flexibility and fewer restrictions. If you have a low credit score or are on a tight time limit, look for a reliable private lender.
Still trying to decide which funding method works best for you? Consult a property management expert to discuss your best options based on your unique scenario, and help you manage the property after closing the deal.
