Commercial property owners have capital needs for a variety of reasons such as purchasing materials and renovations. In a perfect world, property owners would turn to conventional money lenders such as credit unions and banks, to finance their capital needs. This makes sense since conventional money lenders offer the lowest cost of money. But sometimes, traditional financing options is not available to a borrower, or the borrower does not want to use personal funds to finance the project at hand. The solution? Hard money loans New York.
What’s a Hard Money Loan?
In today’s complicated money borrowing world, traditional lenders are simply not able to fulfill all the needs of commercial borrowers. For this reason, borrowers turn to private lenders to finance their projects. You might wonder why a borrower would rather pay more (at higher interest rates) to private lenders (hard money lenders) instead of holding off the project until they can secure traditional financing means.
Hard money loans are usually short in duration and come with higher interest rates and fees unlike traditional financing. For most borrowers, the reason for opting for a hard money loan is to fulfill their goal and earn profit after completing the project. Hard money loans play an important part of the commercial real estate industry. But it’s not only useful for that. There are also other instances where hard money loans New York make sense for borrowers. They are as follows:
- Capital Improvements
If a property or project needs capital improvement repairs or renovations which, if completed, would increase the value of the property both from a rental income or valuation point-of-view, a borrower may consider the shorter duration-higher interest rate as a smart move that can help them with improving their property/properties. In situations like this, once the work is completed and the property increases in value or rental income, the borrowers can then look for other traditional financing options to pay off the hard money loans. This way, they can replace the loan with lower cost financing. Another option would be for the borrower to sell the property and take the profit and move forward to another project.
If the borrower owns a piece of land and wants to move ahead with a “ground-up” development, they might find hard money loans quite useful. Hard money loans New York will provide them with a source of financing that cannot be found in the traditional marketplace. Lenders will look at a number of factors when evaluating the creditworthiness of the project including the borrower’s experience in development, the borrower’s equity in the project, project presentation, collateral, timeline, as well as the borrower’s financial reserves. A flaw in any or two of these factors may result to the traditional lender rejecting the loan application.
Hard money lenders, on the other hand, will look into the same factors but weigh them differently when it comes to their final decision. Traditional money lenders often place a limit on the construction loans they make as part of the total development costs. In comparison, hard money lenders can lend up to 100% (or more) of the construction costs, if they determine in their analysis that the project warrants such. This means that where traditional lenders limit the amount of loans they can give, hard money lenders may consider the profitability of the project in making the final decision.
3. Purchase of Property
When it comes to purchasing properties, the timing of the purchase is often very important. Hard money loans New York serve this market and provide borrowers with an effective tool in the purchase process. Many lucrative real estate opportunities and strategic property purchases are usually time sensitive. Traditional lenders usually do not provide quick financing and therefore, are not a good alternative when it comes to these types of real estate deals. Hard money loans New York are faster and are able to assess, approve, and approve loans faster than traditional lenders.
4. Undervalue/Underperforming Properties
Undervalued properties refer to properties that perform below market efficiency. These properties are good candidates for hard money lenders. Traditional lenders avoid these types of loans because of the underwriting guidelines involving income statements and current expenses.
In comparison, hard money lenders focus mostly on the value of the underlying property. A real estate investor can get the necessary financing to improve their property, increase rental income, fill vacancies, and manage their expenses with a well-constructed loan. Investor can seek out traditional financing once the property is stabilized. This will help keep interests costs low as they go forward.
5. Loan Underwriting
The creditworthiness of borrower is often the main focus when it comes to underwriting a traditional real estate loan. Traditional lenders are limited in how creative they can get in the loan approval process due to regulatory guidelines. Factors such as tax liens, late payments, foreclosures, mechanic liens, bankruptcies, and high debt levels play an important part in the underwriting of a loan.
Hard money lenders create their own standards with regards to the amount of risk they are willing to accept. These lenders can set asset-based loans wherein the basis of the loan is the property itself.
Current restrictions in the traditional financing industry make it difficult for real estate investors that own more than 10 single family residences to borrow additional funds. Hard money lenders do not worry too much about the number of properties an investor owns. Instead, they evaluate the property itself as well as its profitability as an investment.
To sum it up, hard money lenders can have a negative impression because they charge higher interest rates compared to traditional lenders. But hard money loans play a huge role in the real estate investment industry because they fill a need that is created due to lack of traditional financing resources. Hard money loans may have higher interest rates, but it is well worth the purpose it serves. With this type of loan, investors will be able to get the financing they need and earn profitable yields with the security of the first position lien status.