Let’s say you’re a real estate investor who found an incredible deal on a property. You know that this home, apartment complex, or commercial space is an untapped gem just waiting for someone like you to see its value. The problem is, you’re a little short on the cash you’ll need to make that transformation happen. Luckily for you, there’s an industry set up to help this exact situation: hard money lenders. A hard money lender will front the money that gets you where you need to be to grow your business. But are there a bunch of hoops to jump through or insanely high-interest rates? What is a typical hard money lender rate, after all?
Hard money lenders will charge anywhere from 12% – 25% based on several variables. Your experience as a real estate investor, credit history, loan-to-value ratio, and other factors play a big part in the rate you’ll receive. These interest rates shouldn’t deter you, though, as they’re simply the way your lender mitigates risk. If you’re especially worried, try partnering with another investor who has a longer history in business or a better credit score.
Let’s get into this and talk about what I mean when I say “hard money,” the things that affect your interest rate, and why I feel like it’s well worth the cost to go at it without bringing on a partner.
What is Hard Money?
Hard money is essentially gap financing for real estate investors. It’s rarely enough to cover the total purchase price of a home, and the terms are much different than a mortgage.
You see, hard money lenders are here for you when your investment needs an oomph to turn profitable. Whether it’s for minor repairs, upgrades, or a complete overhaul, hard money lending is a valuable tool to have in your real estate arsenal.
That said, you must understand the difference between a traditional bank and a hard money lender. You see, most banks will lend based on the current market value of a property. Hard money, however, lends based on the estimated future value of a home. They understand their place in this is for investors who see potential in an untapped property, so they work on a business model based on the understanding that profits will more than pay back their initial loan.
Consequently, hard money lenders take on more risk than a traditional bank. Not only are they offering financing based on estimates of a future market, but they’re also betting that the repairs or upgrades paid for with their loan will be a net positive.
While in most cases everyone comes out ahead, sometimes things don’t work according to plan. Market fluctuations can crush property values, shoddy workmanship can wreak havoc on a home, and overwhelmed investors can give up and walk away from an investment that’s turned into a money pit.
There’s a lot of risk that comes along with gap financing, so before you dive into looking for private lending, I wanted to give you a quick overview of where your potential hard money lender is coming from. Hard money lenders aren’t FDIC-insured like banks, either, so they have to find other ways to protect their businesses.
What are Typical Hard Money Lender Rates?
So now, let’s get into the nitty-gritty of what you should expect to see in a hard money loan and what factors they consider when issuing your interest rate.
Hard money lenders work with a ratio called “Loan-to-Value” or LTV. Let’s say you come to them needing $50,000 to buy a home that’s worth $100,000. Since your LTV is low, there’s not much risk for your lender, so they should give you a better rate than someone who needed $90,000.
You should expect to see anywhere from 12% – 25% based on your LTV and a few other factors. While that might seem like a high rate, keep in mind the lender’s risk. Above all, don’t be scared off by these rates. Remember that successful investors understand that it’s better to have $20,000 at 15% interest to increase profitability than lose an incredible deal because you’re $20k short.
When you’re looking for a lender, shop around to see which company has the best rate for your situation. Also, you’ll have a better chance of securing a loan if you have a property under contract.
Variables that Will Affect Your Hard Money Loan Interest Rate
So why is there such a broad range when it comes to interest rates? It has to do with a few factors:
- Your experience as a real estate investor. Lenders want to know they’re dealing with a professional. The more experience you have, the less risky an investment you are, so your interest rate will likely be lower than a new investor’s.
- How much money you’re putting into the deal. The more skin you have in the game, the more confident your lender will be to offer you a lower interest rate.
- Who will be covering repair costs? Repairs are risky. Contractors can ghost clients, work can be shoddy, or one minor repair can find bigger issues that need fixing. If your loan is the one footing this bill, then your lender will want a higher interest rate to cover the risk.
Can I Get a Hard Money Loan with Bad Credit?
Unlike traditional lenders, hard money businesses don’t put much weight into credit scores, employment history, or other things like that. In most cases, your credit history won’t stop them from giving you a loan.
While your credit score isn’t a factor in whether or not you’ll get the loan, it can be a factor when it comes to the interest rate you’ll get. If you have things like bankruptcies, foreclosures, judgments, or collections on your credit report, you should expect to get an offer on the higher end of the spectrum.
The best way to avoid having your credit score be a factor is to partner with someone with good credit and have them apply for the loan. I personally am not a huge fan of this strategy. In my opinion, it’s more profitable to pay the 20% interest than it is the 50% profit share you’d owe a partner.
Hard money lenders are an excellent resource for real estate investors who need funding for a potential deal. In most cases, they’re easy to work with and will have way fewer hoops to jump through to get financing. The ease of getting a loan through them comes with a cost, though. The more of a risk they deem you, the higher the interest rate you can expect to receive. But don’t let a fluctuating interest rate stop you from opportunities to grow your business. Work on the factors I’ve mentioned above to get the best competitive rates available.
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