in heaven. For savvy fix and flippers, a hard money loan may be all the financing needed because properties can sometimes be bought, renovated, and sold within time frames of six to nine months. This sort of quick turnaround is the very basis of fix and flip mentality and methodology.
Since fix and flip investors continually find and rehab properties, it is possible to develop a good working relationship with a hard money lender that is profitable for all concerned. One thing that fix and flip investors most appreciate about hard money lenders is the fact that experienced hard money lenders share the same understanding of after repair value (ARV) that investors do. Unlike traditional bank lenders, hard money lenders factor in the ARV when making lending decisions. Banks consider only the actual value of the property at the time of purchase, and rarely make decisions which take into account the value of property as it will be after it has been renovated.
Rapid funding and consideration of ARV are, of course, just two of the factors making hard money loans attractive for fix and flip investors. But what about those who prefer to buy and hold properties? Can hard money lenders help this type of investor at all?
Conventional wisdom would appear to indicate that traditional bank loans may be a better option for the investor thinking of buying and holding a property for a long period of time. Because hard money loan terms are often as short at six to nine months and traditional loans may be up to thirty years or more, it might be assumed that hard money can offer no advantage to the investor planning to hold on to a property for several years.
However, consider this scenario. Perhaps you are a buy and hold investor who finds a property that is in need of some major repair. You may be drawn to the property because you see its ultimate potential. It is a diamond in the rough, and you know just how to polish it up. But, if your only source of funding is through a traditional bank lender, a major expenditure of capital will be necessary on your part to secure financing for this particular project. The fact is that banks are not likely to fund a rehab project for you.
You might protest. Why, you may be wondering, would a bank be hesitant to lend me money for a new project when I have developed a good relationship with them in the past or when I obviously have good credit? The answer is simple. If the property in question does not meet the underwriting requirements of your banking institution, no amount of good credit on your part is likely to make the bank finance a loan for a property that is in need of rehab.
Hard money lenders, on the other hand, have somewhat less stringent requirements. This makes it more likely that a rehab property will still meet their guidelines, provided the ARV is there. So, it is possible to use hard money loans to rehab properties and bridge the gap between a property's original value and its after-rehab value.
Using hard money loans as bridge loans will enable buy and hold investors to rehab properties and bring them up to a value that would be sufficient to secure more long-term, traditional financing from a banking institution.
So, regardless of your investment preferences, hard money loans can be valuable tools at your disposal when investing in real estate. If you are interested in more information about how hard money can work for your investment strategies, please contact us. We will gladly work with you to achieve the outcomes you want for any type of real estate investment.
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