You will also want to obtain insurance for your assets, and since lenders have a vested interest in your property, they will often require this. Many of the closing costs, fees, and underwriting expenses will be paid for by you, so make sure you’re able to cover these expenses so you can avoid placing yourself under undue financial stress on top of having to repay the loan.
Make a Quick Repayment Plan
Many hard money loans are issued with a payment timeframe of twelve months, and if you don’t repay the loan by then, you risk losing the collateral. Some lenders will allow you to make a lump-sum repayment once you are done with your project.
If you don’t intend to improve and then sell the property, that means you’ll need to secure a long-term loan solution during this time. Fortunately, with an asset that now carries more value after completion, or generates cash flow, it should be easier to get an institutional lender interested in helping you with a long-term loan. If worse comes to worst, you may need to find another bridge loan to replace your original hard money loan, though this is obviously not an optimal solution-which highlights the importance of making sure your team is on board to get the project done on schedule.
Hard Money Loan Pros and Cons
Hard money loans are great for investors with short term goals, such as those who fix and flip or a real estate developer who will be selling off units. Hard money loans can also work for investors with a long-term project, such as some cash-flow-generating commercial real estate or residential real estate rentals. However, these investors will most likely need to be more experienced, have a decent portfolio and history of success, and be tapped into a good network of lenders, because they will need to get a long-term loan solution in place before the hard money loan needs to be repaid.
That said, hard money loans offer great speed. Though the lender would prefer to get their money back rather than the property, the collateral itself carries decent investment potential, so they won’t need to spend long amounts of time going over your loan application with a fine-tooth comb. This can help investors close deals quickly, especially when they’ve worked with a lender before. In some cases, a phone call to the lender can be followed minutes later by an all-cash offer and a handshake with the seller (although there will still need to be some paperwork).
Hard money loans also offer great flexibility. Banks and traditional lenders are often locked into strict rules about how they lend money, while hard money lenders can be more flexible about things like terms of repayment, interest rate, the property in question, and other factors. This is a great boon to investors who don’t want to be locked into paying a non-negotiable loan origination fee or suffering from a much-dreaded balloon payment.
Hard money loans have much higher interest rates, often in the double digits. Lenders needing to protect their own interests may also include a number of fees and penalties for deviating from the terms of the loan. For investors just starting out, it can be very difficult to lock down a relationship with a fair and reputable hard money lender-and there are plenty of loan sharks swimming in the water.
The future also is uncertain. If you can’t sell the property in time or you can’t lock down long-term financing, you might lose the property and the work you’ve invested in it, or you might have to search for another high-interest swing loan to get you through.