One of the biggest obstacles stopping potential investors from entering the market is the financial aspect. The process can seem intimidating, especially to new investors. Many people think you need a large amount of money just lying around to invest in real estate. However, this is a myth. Not every real estate investor starts with a large bank account and many more start with even less than that.
To help overcome that barrier, a new solution has arisen: hard money loans. This type of short-term real estate financing allows you to start your real estate investment with a loan based on the property’s value.
With it, you can buy the property and make repairs and improvements to prepare it for its sale. Of course, there are trade-offs to consider before taking out a loan like this. Hard money loans can be helpful, but they can also be a burden on your finances. You must do your research and consult with a professional before making any decisions.
Here are some things you need to know about the hard money loans before you get one:
1. Interest Rates Are High
The first downside to hard money loans is the high-interest rate. Hard money lenders are not as worried about the risk associated with these loans because they have various options to make money back from your investment. For example, you can either make the loan with equity or with a second mortgage on the property. The moneylender will make money back from the interest.
Interest rates for hard money loans often range between 10 percent to 20 percent, depending on the loan to value. The higher the loan to value, the lower the interest rate. The interest rates may also depend on your credit score as well as the purpose of the loan.
2. Getting Approved Can Be Hard
Another one of the risks associated with these loans is getting approved. Because the money lenders have a high rate of return on their investment, they only work with borrowers with good credit scores. This is to protect themselves. They also get a higher rate of return when they approve loans with a lower LTV. Therefore, they are more likely to approve loans with higher LTVs.
The moneylender also wants to protect themselves against property values. If the property values go down a significant amount, the lender can either foreclose the loan or allow you to refinance the loan and take a portion of your property’s value as a loss. To combat this, the lender will often have a clause in the loan for a prepayment penalty. This means that if you refinance the loan or pay it in full before the loan is due, you have to pay back the moneylender.
3. You Usually Have to Borrow The Full Cost of Your Investment
When you shop around for a mortgage or other type of loan, the lender typically requires you to put money down on your loan. If you want them to extend you a loan, you will need to prove that you can pay it back. For example, if you are trying to get a loan for $300,000 to invest in a rental property, you would need to have $40,000 laying around for the down payment. The lender will then take the $40,000 and add it to the loan amount, $340,000.
This is not how hard money loans work. Because they are short-term loans, they don’t care how much you have to put down on the loan. Instead, the moneylender will issue you a loan for the total amount, which would be $300,000 in the example above. Overall, this can be inconvenient or risky on your end.
These three risks are just some of the things you need to consider before getting a hard money loan. Keep in mind. This is not a guarantee that these risks will happen to you. You also need to be aware of the benefits and advantages of these loans. Hard money loans can be a great way to begin investing in real estate or pulling together a deal that otherwise would not have happened.
If you are interested in getting a hard money loan, research your options and consult with a professional first. DFW Investor Lending, LLC is owned and operated by investors, just like you. But with a unique twist: we are also residential real estate appraisers. Who else could be better qualified to assist you with your real estate needs than us? If you are looking for the best Dallas Hard Money Lenders, you’re in the right place. Get started today and apply online!