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.