Hard money loans have become an integral part of the house flipping process. In this article, we outline 5 of the best hard money loan benefits, while highlighting the biggest drawbacks at the end of the article. Let’s get started.
1. Much Faster Than A Traditional Home Loan
When applying for a traditional home loan, it is common for the process to take several weeks, if not longer. This is not ideal for property investors who need to act swiftly in order to secure the deal that they have identified.
With hard money loans, you can eliminate the waiting period and the administrative hurdles that often trip people up, especially first time investors. Provided you work with a reputable lender, you should be able to get access to capital in less than 10 days.
2. Ideal for fix and flip projects
If you’re new to the property flipping game, you might not realize just how fast the process can be. For instance, most hard money loans have a maximum loan period of 24 months. More importantly, experienced fix and flip investors aim to complete their projects within 6-10 months. Every month longer becomes an expense that they will have to carry.
3. Hard money loans can be used for BRRRR investing
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. It is actually very similar to house flipping, except the end goal is to rent the house after renovating it (rather than selling it).
The underlying point is that Hard Money loans can allow BRRRR investors to purchase the home initially, before they apply for a long term loan with a lower interest rate. Again, the main advantage here is that BRRRR property investors can get quick access to capital and seize the investment property as fast as possible.
To learn more about BRRRR investing, this BRRRR Calculator can help you understand the process in greater detail.
4. It’s easier to get approved
With a normal home loan, you are more likely to be rejected than a hard money loan. This is partially because the hard money lender can use the house as collateral if your property deal falls through for whatever reason.
Of course you still need a reasonably good credit score to be approved, and you must have the financial means to pay back the loan each month. The real point is that hard money lenders are more inclined to approve applications for investment properties than banks are. This is one of the main reasons there are so many hard money lenders out there. They ultimately fulfill a very strong market need.
5. Your Monthly Installments Are Interest Only
In most cases, hard money lenders will only charge you the interest portion of the loan when calculating the monthly repayment. This differs from banks, who factor the interest and the capital owed into your monthly repayment.
Now that some of the best benefits of hard money loans have been listed, it will be worthwhile to consider the two biggest weaknesses of hard money.
Two Biggest Drawback of Hard Money Loans:
Interest Rates Are Higher Than Normal Home Loans
Where long term loan interest rates are likely to range from 4,5% to 7%, hard money loan interest rates usually start from around 10%. The higher the interest rate, the bigger your monthly repayment will be.
You are required to pay back the full loan amount at the end of the loan period:
People may not intuitively know that you are required to pay back the full loan amount when your hard money loan concludes. It’s a bit like having a big balloon payment on your car.
Most investors will use the proceeds from the sale of the house to pay back the hard money lender in full, while pocketing all the profit in the process. However, if things take a turn for the worse and you aren’t able to sell the property, it could go into foreclosure. This is something you want to avoid at all costs. If you do find yourself heading in this direction, speak to your lender about a loan extension. It could be the difference between losing the house to foreclosure, or selling it for a handsome profit.