If you ever tried to get a commercial mortgage loan from a traditional bank, you know that the process is often mired in red tape. All the waiting can sometimes cause you to miss out on a deal. The good news is that it’s possible to get funding faster. This is where hard money loans for commercial real estate come in.
Sometimes called bridge loans, hard money loans refer to short-term lending instruments routinely used by successful property investors, particularly those involved in flipping and real estate development. They can be ideal for those whose goal is to develop or renovate a property and then sell it for a profit. Unlike traditional loans that banks mainly offer, private individual investors or groups of lenders are issued hard money commercial mortgages.Hard money financing is not based on a borrower’s creditworthiness (unlike traditional bank loans). Instead, hard money and bridge financing lenders look at the value of the commercial property itself when determining whether or not to approve a loan application. They focus specifically on the after-repair value (also called ARV), an intelligent estimate of what the commercial property might be worth when the development or renovation phase is completed.Before discussing the many benefits of hard money loans for commercial real estate, it’s essential to understand that it’s not the perfect financing solution for every situation.Cost is one significant drawback of hard money loans. Hard money loan rates can reach up to 10 percentage points higher compared to a conventional loan. You also have to budget for things such as origination fees, closing costs, and loan-servicing fees.It’s also important to consider the fact that commercial hard money loans have shorter repayment periods. This type of financing is primarily designed to allow borrowers to get a commercial property developed/renovated so that it’s ready to go on the market as fast as possible.So if you’re thinking of getting complex money financing, it’s essential to have a solid business plan in place. It would be best to have a clear idea of how soon your project will become profitable and be confident that you can repay the loan on schedule.
Despite the potential drawbacks, many seasoned commercial real estate investors routinely use hard money because it offers benefits that are hard to find in other types of financing. Here are seven of the most significant advantages of hard money:
The Dodd-Frank act has made applying for mortgages even more time-consuming because banks have to follow all sorts of regulations before lending to a potential borrower. It often takes months to close on a commercial mortgage loan—and this delay can cause investors to lose out on time-sensitive projects.Hard money loans can make funding available in a matter of weeks, or sometimes even days, depending on the lender. This quick turnaround time is vital for funding significant scale developments that can’t afford to deviate from the completion timeline.
It’s often possible to negotiate loan terms with commercial hard money lenders—something that’s hard to do when you’re dealing with traditional banks. Many private lenders even allow borrowers to tailor their repayment schedules based on their business plan and requirements.You may also be able to reduce or eliminate the origination fees and other such costs during the process of underwriting.
Most banks prefer borrowers to put down at least 20% of the property purchase price; only doing this can you get better terms on the mortgage loan. Paying any less than 20% upfront means having to purchase mortgage insurance—which translates to a significant increase in your monthly payments.Some investors who provide complex money financing are even willing to lend 100% of the commercial property’s purchase price, depending on the project and your profile as a borrower. This means that you potentially don’t have to make a down payment.
In hard money financing, the commercial property itself usually becomes the collateral for the mortgage loan. But some lenders allow borrowers a bit of leeway in this regard. For instance, they may allow you to use your assets—such as a residential house you own or your retirement account—to secure the loan.
Was your application refused by the bank even though you’ve shown a steady cash flow, a solid income-to-debt ratio, and stellar creditworthiness? Hard money lenders may be able to give you the financing you need for your commercial real estate investment.
Your bank probably doesn’t have any interest or know-how in that type of commercial property you are investing in or whether or not it will be profitable. But hard money lenders often have in-depth industry knowledge.Those who lend locally also understand the commercial real estate market in your area, so they can give you advice on ensuring the viability of your investment. They want you to succeed; after all, your success means their success, too.
If you’re relatively new to the commercial real estate investment space, it’s hard to raise capital on your own. Hard money may allow you to buy a property without spending much of your funds.And once you have established yourself as a reliable commercial property investor, traditional banks may be more willing to lend to you. You can get conventional mortgages with lower interest rates. Your experience will also allow you to establish relationships with other private lenders.When they see that you’re good about honoring the terms of your contract and that you pay your loan back responsibly, hard money commercial lenders will likely be more willing to work with you on future projects. They may become more comfortable reducing the origination fees, cutting the application process shorter, and lending you a higher percentage of the property’s purchase price.
Hard money loans can be a good fit for commercial property investors who quickly need to pursue a project. They have a terrible reputation for being lending instruments solely for borrowers with bad credit scores.But this is not true. Even wealthy commercial property investors and successful developers and flippers routinely use hard money financing to enjoy immediate access to funds for time-sensitive projects.But while it does have many benefits, it can also be more expensive than traditional loans. This is why it’s essential to evaluate your hard money lender and ensure that you understand the interest rates, loan terms, and fees involved in the transaction.Paying too much or cutting the repayment period too short can affect the profitability of your real estate venture in the long run. Talk to a commercial mortgage expert to see if this kind of loan is right for you.
