What Is a Hard Money Bridge Loan?

A Hard Money Bridge Loan is a type of loan that is issued by a Hard Money Lender. It’s a private company or investment pool instead of a conventional bank. You may have heard about Hard Money loans because of their increasing popularity in the fix and flip housing market.  The most common situation it is used under is residential and commercial real estate transactions.

Didn’t know that money could be hard?  The term hard money comes from the idea that there is an actual hard value behind the loan.

Generally, it does not exceed 85 percent of the residential property value and 65 percent for commercial properties. Hard Money Bridge Loans typically having higher interest rates and shorter pay-off time periods.

What Purpose Does it Serve?

Are you contemplating a bridge of hard money right about now and wondering what it could possibly be used for? Allow me to give you the scoop. Bridge loans are used as a stop-gap for certain situations and is then repaid shortly after. Common loan terms are 12 months to 36 months.

Imagine this, you’ve found a house that needs some fixing and intend to flip it for a big profit. You go to the bank and get a big fat no, its too big of a risk. That’s where a Hard Money Lender comes in and offers a bridge loan against the value of the property.

You spend 6 months renovating and turn a nice chunk of change for your efforts. The loan is repaid with money from the sale.  You wouldn’t be the first one, flipping houses is now a $56 billion market and private or hard money lenders have plenty of hands in this cookie jar.

How it Can Help You?

“Money is a guarantee that we may have what we want in the future. Though we need nothing at the moment it insures the possibility of satisfying a new desire when it arises.” -Aristotle

Bridge Loans can be helpful for residential property owners as well as property investors. Sometimes a family may be selling their home with the intention of using the funds to purchase a new home.

If a hiccup occurs and the timing isn’t just right a family could find themselves missing the opportunity to purchase their dream home. A hard money bridge loan can fill a need until the old home is sold.

In certain situations, money is needed before permits have been finalized. A conventional bank won’t issue a loan until the ink has dried on permits. So how does a developer get started without any capital?

Getting a hard money bridge loan offers developers the chance to get the funds they need now and pay it back after a loan with lower interest through the bank becomes available.

Real estate isn’t the only customer of the hard money bridge loan, businesses that loose major investing partners take advantage too. If a stockholder pulls out their investment and the company faces certain death, a bridge loan replaces the lost funds and is paid back when a new shareholder comes into the fold.

Don’t Get Scammed

Be on the lookout for predatory lenders, while many Hard Money Lenders are honest and true there are still some bad apples in the bunch. USA.gov offers some helpful tips to protect yourself.

Some easy to spot red flags are lenders who offer to pay more than the property is worth, hoping that the loan will go unpaid so that they can reclaim the property.

Interest rates that are too low will generally be accompanied by unexpected fees to lure you into choosing their lending firm over others with higher interest rates. That firm turns a profit with undisclosed expenses. Keep your eyes peeled for firms that seek a loan insurance fee upfront or demand it in a strange payment method.

A general rule of thumb is no cash upfront, the majority of the fees will be processed at the closing of the loan terms through a title agency. Always question a lender who asks for money upfront for a loan insurance fee, these should be paid to the loan insurance company directly.

Lastly, vet your lender, cross-reference phone numbers with known scams. Speak with someone over the phone, visit the office or get a reference from trusted reviews or friends.

Sources:

https://www.forbes.com/sites/forbesrealestatecouncil/2017/12/05/how-the-rise-of-private-lending-is-reshaping-the-mortgage-market/#5a8a750552ae

https://www.attomdata.com/news/heat-maps/2016-year-end-u-s-home-flipping-report/

https://www.usa.gov/mortgages#item-36897

 

 

hard money overview

Hard Money Commercial Loan Overview

There’s no denying real estate investment is an extremely profitable business in America right now. A quick look at housing development trends will back this up. According to the Department of Housing and Urban Development (HUD), 854,000 single-family housing units were started in the first quarter of 2019. This means many investors will be seeking a hard money commercial loan to get their projects off the ground.

Traditionally, commercial and residential real estate investors would get the capital they need by applying for a bank loan. Unfortunately, this comes with a number of limitations. If an investor’s credit history is unhealthy, there’s a good chance they’ll be denied the loan altogether.

In recent years, however, hard money commercial leaders have become an invaluable resource for large-scale commercial and residential investors. Let’s break down the basics of a hard money commercial loan to determine if it’s right for you.

Understanding a Hard Money Commercial Loan

It’s important to understand the distinction between a hard money loan and a traditional bank loan. This knowledge is key if you’re in the commercial real estate industry and need to make a quick decision to secure capital. Getting the wrong type of loan could result in a financial loss once repayment begins.

An important distinction between a hard money loan and a bank loan is the type of lender. Because hard money loans are provided by private lenders instead of financial institutions, the entire process is different. These differences can be a huge benefit for many investors.

When applying for a commercial hard money loan, the lender looks at the value of the property instead of your credit history. Let’s say you apply for a hard money loan so you can start a commercial development project. The lender will look at the scope of the project and the value of the completed property. This is done by calculating things like gross scheduled income, and net operating income. They’ll use the property as collateral against the loan. If you default, the lender can take the commercial building as repayment.

Why Investors Should Consider Hard Money Loans

It’s important to note that a commercial hard money loan doesn’t come without risks. You must ensure you can pay back the money or you could potentially lose your property. However, if the conditions are right, a hard money loan will prove advantageous.

Real estate investors must make quick decisions. The famous real estate entrepreneur Jeff Greene made a great point when he said, “In real estate, you make 10% of your money because you’re a genius and 90% because you catch a great wave.” When a great wave comes, you need to ride it.

A major benefit of a hard money commercial loan is you can get approved quickly. Because the lender doesn’t have to look into your financial history, the process is much faster.

Another advantage is that private lenders tend to be much more flexible than banks. You can negotiate repayment terms and interest rates. You can also work out deals where the lender recoups personal assets first if repayment terms aren’t met.

Things to Watch Out For

There are also a number of disadvantages attached to hard money commercial loans. You must analyze your financial situation, the scope of your project, and projected earnings before applying for one.

One of the biggest disadvantages of a hard money commercial loan is the interest rates. They tend to be much higher than traditional bank loans. This means you need to be certain you can pay it back fast. If you plan on making a big profit off your investment right away, this shouldn’t be a problem.

Another potential disadvantage is the shorter repayment period most hard money loans carry. Keep in mind that these loans are meant to allow investors to buy property or start development projects right away. These aren’t long-term mortgage loans. That being said, if you don’t feel like you can adhere to the repayment period, stay away from a hard money loan.

Is a Hard Money Loan Right for You?

When considering a hard commercial loan, a good rule of thumb is to determine when your property will become profitable. You need to have a solid business plan in place and know exactly how much time it will take to complete your project. If all these details are in order and you simply need the funding to get started, a hard money loan may be the perfect move.

Resources:  https://www.huduser.gov/portal/sites/default/files/pdf/NationalSummary_1Q19.pdf

https://www.wikihow.com/Evaluate-Commercial-Property

Commercial Loans

Hard Money Commercial Loans Deliver Fast Options

The world of business can be extremely fast-paced, regardless of what industry you’re in. When a good opportunity arises, you may not always have the cash to hand to make the most of it. This is where hard money commercial loans come in.

A 2018 Federal Reserve survey found that 56% of businesses that applied for a loan or line of credit did so in order to acquire new business assets or pursue a new opportunity. Traditional banks offering approval rates of around 27% and lower depending on any outstanding debt or poor credit score. It can be difficult to take advantage of that good opportunity at the right moment. Also, traditional lenders can take too long with the approval process, preventing you from striking while the iron is hot. Hard money commercial loans are quicker and more suited to business than most traditional business loans.

What is a Hard Money Commercial Loan?

Hard money commercial loans are lines of credit extended to business owners, usually to expand their company. Hard money doesn’t come from a bank or traditional lender. It comes from a private investor or a group of investors who’ve formed a company to lend to businesses.

If you’re interested in buying a new commercial space to extend your business properties or if you’re planning to renovate for a re-brand or build an extension, these are all areas where hard money commercial loans can help out. Development and construction are the most common uses for hard money commercial loans.

Hard money loans are usually options for certain business entities, such as a limited liability company or an s-corporation. These kinds of loans are not for individuals.

Why are Hard Money Commercial Loans Different?

Firstly, they deliver fast. They have much quicker approval times than the average bank. This is vital in business and the investors know this. They are business people themselves, not mortgage providers who have a checklist to go through before approving the loan.

Another way that hard money commercial loans are different is that each application is assessed differently. The main criteria they look at is property. Often you can take a loan out against the value of the property that you are buying. Their interest rates will be much higher though, and this is one of the things that can scare people off them. This is because the investor wants to protect the investment that he/she has made. If you default on paying them back, they will come for your property. It’s risky, but if you’re confident that your expansion will work, then it’s all to play for.

The length of the term in hard money commercial loans is also quite a bit shorter than traditional loans. Usually, they are around two-three years maximum, although you may find an investor willing to stretch to a five-year loan, under specific circumstances.

Hard money commercial loan investors like to build long-term relationships with those that they lend to, as they know it can be profitable in the long run. David Voxlin, the founder of Craved, a retailer of U.K. craft food and drink, talks about the importance of building those kinds of relationships: “First of all, you have to be really comfortable with your investors and trust them completely. These are people that you will almost certainly have a very long-term relationship with, and unlike employees, you don’t have the option of letting them go.”

Why You Should Consider A Hard Money Commercial Loan

If you are a start-up and confident that your product or service is going to do well (according to market research, not just a gut feeling) but you need an injection of capital, then hard money commercial loans can be the perfect match for you.

Big banks aren’t particularly interested in providing smaller loans – it’s a lot of paperwork for not much return, particularly when loans are under $250,000. When you need to get something off the ground quickly, approaching lender after lender and going through a lengthy process, only to receive a “no” is wasting time when your competitors could be getting a step ahead.

Building a relationship with a hard money lender could pave the way for some unexpected bonuses in the future. Hard money commercial loan providers know about business and if they have confidence in you, they may ask you to partner on other deals at a later date.

Put simply, hard money commercial loans are one of the most viable ways for a small or medium business to take it to the next level.

Resources:

https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/sbcs-employer-firms-report.pdf

https://www.simplybusiness.co.uk/knowledge/articles/2018/05/how-to-get-funding-for-a-business/