This article is for informational purposes only and should not be construed as financial or legal advice.
Maximize your rental property’s value by making strategic upgrades that boost its interior and exterior appeal. However, this advice is often easier said than done for most landlords who struggle with funding. On the other hand, experienced investors have hacked into how to use hard money loans to achieve their financial goals and make the necessary upgrades their apartments require. So here’s a quick guide for property owners looking to get the best out of their hard money loans for renovations and why you should consider it.
What is a Hard Money Loan?
Imagine having to wait 4 – 6 weeks to get approval from your bank to secure funds that can help you repaint your rental and buy new furniture, only to get rejected because your credit score is too low or you’re between jobs. If you’re looking for a short-term asset-based loan with a quick turnaround time, hard money loans should be your go-to. Unlike traditional bank loans, this financing option is backed by private lenders who in exchange for higher interest rates and shorter timelines offer investors quick funding. As a result, you can leverage timely opportunities and keep your renovation projects funded and on track.
Typical Terms for Hard Money Loans
- Loan-to-Value Ratio
Find out how much of the property’s appraised value your lender will loan you. As a rule, most lenders are only willing to offer property owners 65% – 75% of what your home is worth as funding. It would be best to work with that figure in mind when creating the budget for your renovation, especially if you don’t have savings or an alternate source of funding.
- Interest Rates
Prepare for interest rates that range between 8% – 15% of your principal amount when you opt for a hard money loan. One of the drawbacks of this type of financing is that the interest rates tend to be higher than conventional mortgages and other financing options. Thus, it can be more expensive to pay off, and easier for property owners to experience default. You can work with a team of hard money lenders in Maryland if you have questions about terms that align with your investment goals.
- Loan Terms
Create a repayment plan that takes your limited timeline into consideration when planning your exit strategy. Aside from charging high interest rates, hard money loans are typically short-term, ranging from 6 to 18 months in timeframe. As a result, investors need to make plans to sell their newly renovated property or refinance it to meet up with their loan repayment obligations.
Top 3 Reasons to Use Hard Money Loan for Renovations
- Fast Approvals
Streamline your renovation projects with speedy approvals when you opt for a hard money loan. One of the best advantages of hard money loans is that you can get a reply and funding within a week of your application, as opposed to traditional loans which can take up to a month. Thus, hard money loans are perfect for fix-and-flip projects that require fast funding, and minor cosmetic changes before going back on the market.
- More Flexibility
Choose what projects to spend your funding on with private loan options. It’s common for traditional banks to exercise a lot of say in what you can or can’t use their money to do. For example, many of them place strict restrictions on distressed properties, which can be a major bump if you’re an investor looking to turn a profit by rehabilitating dilapidated properties. On the other hand, hard money lenders are a lot more lenient, giving you more flexibility on what projects you can undertake. Thus, you can use renovation loans to maximize these improvements that can add value to your property.
- Circumventing Bad Credit
Bypass related to bad credit by opting for a hard money loan. If you don’t have a clean financial history, it can be difficult to secure a traditional bank loan. In comparison, private lenders care more about your property’s value and exit strategy, which makes them a better funding alternative for investors with bad credit scores. As long as you have a solid exit strategy and a high-value property, you can comfortably secure funding to renovate your investment.
Conclusion
Boost your rental property’s value through strategic renovations with funding from a hard money loan. These short-term, high-interest loans are a popular financing solution for investors looking to upgrade their properties quickly and earn some extra points with prospective buyers and renters. As a result, they’re the go-to loan option if you want a speedy approval rate that’ll allow you to leverage time-sensitive opportunities. They also offer a lot more flexibility, making them perfect for multiple projects including high-risk fix-and-flips. Another advantage is that you can secure them even with a bad credit score, which can help investors with a murky financial history still get funding.