Home » Rental Properties and Hard Money Loans: Should You Use Them & How?

Rental Properties and Hard Money Loans: Should You Use Them & How?

by Tim

Thinking about investing in real estate? Possibly buying a rental property? But, you’re not sure that your current credit score will actually make you eligible for a loan. And, you don’t have enough cash just lying around waiting for you to make one of these large purchases.

So, does any kind of solution exist for your problem, or should you just give up on the entire idea of investing?

You may want to get acquainted with a concept known as hard money loans: https://en.wikipedia.org/wiki/Hard_money_loan

You may have heard of the idea of hard money loans previously, and you may even have some understanding of what this concept entails. But, chances are that you’re not quite knowledgeable about it just yet, and that you’re looking to expand your knowledge.

Understanding that these are the types of loans that allow some people to get funding even if they don’t have a good credit score is not enough.

On the contrary, you need to learn much more. And what you want to learn is not only what hard money loans are, but also how they work when it comes to investing in rental properties. Is using these to buy a rental property even possible, and if so, is it a good idea for you?

Those are just some of the questions you probably have right now, and below I will answer them for you, shedding light on the concept and helping you understand whether you can rely on this option for buying rental properties.

What Are Hard Money Loans?

So, let us now begin answering those questions for you. Naturally, we first have to cover the basics, helping you understand what a hard money loan is in the first place. In short, this is a short-term loan that is backed by an asset, and it is often used by investors who are looking to access some capital quickly.

They prioritize the value of the property over your credit score, and they are usually provided by private companies. Click this to understand the concept even better.

Now, the advantage of these types of loans lies in the fact that you can get quick cash, which is important if you need to close a certain deal quickly. They are processed within a few days, which is much faster compared to the concept of taking out a traditional mortgage, which could take up to a few months to be completed.

Furthermore, a lot of lenders don’t require credit checks when giving out these types of loans, which is another advantage, especially if you don’t have a very good score. And then, there is also the fact that you can get out of debt more quickly, given that we are talking of short-term borrowing.

Of course, this type of solution also has its downsides, as all of them do. First off, there is the fact that the interest rates tend to be a bit higher, given that the lender assumes greater risks by not performing the credit check.

Even though the loan is backed by collateral, it is still considered risky for the lenders, which is why they work towards protecting their own interests by increasing those interest rates. Plus, the required percentage of the down payment is higher than the one required on traditional mortgages.

What Are Hard Money Loans?

Can You Use Them to Buy Rental Properties?

Having understood what this type of funding solution entails, chances are you are now wondering whether it can be used for buying rental properties. In other words, you are not sure if there are lenders out there willing to provide you with this option when you’re looking to buy a rental property. Well, the answer is yes. You can undeniably find those lenders willing to work with you in this process, so there is absolutely no need for you to keep wondering if this is possible. Because it is.

Should You?

The bigger question is perhaps whether you should actually do this. Getting a rental property hard money loan does come with its advantages, but you may also be concerned about the disadvantages, and thus unable to decide if this is something you should do or not. Let me, therefore, give you a clearer idea of why this may be a good move, while also addressing some of those disadvantages in the process, aiming to ultimately help you decide.

The accessibility and flexibility of this option are enough to make it appealing to everyone. Not to mention the speed of processing everything and actually getting the money. As a real estate investor, you may have come across a great deal, but you may be lacking the money to close it. Working with lenders to get a hard money loan can resolve that problem for you and help you get that great deal before someone else snatches it.

Should You?

Furthermore, the lenders may be more lenient when it comes to the criteria that make you either eligible or ineligible for the loan. Meaning that they pay more attention to the value of the property than to your specific credit score and your income situation. And then, while you may consider the fact that this is a short-term loan a disadvantage, it can actually be a huge advantage. Put simply, you will get out of debt sooner, as most of these loans range from six months to a few years.

On top of it all, the fact that the interest rates will be higher than on a traditional loan doesn’t mean you won’t be able to find a good offer. Quite on the contrary. There are enough lenders out there that will be ready to offer you a fair deal, and it is your task to find them.

How to Do It Right?

You now know what hard money loans are (more info) and how they can help you buy rental properties. You also know that getting a fair deal is possible. What you may not know is how to get that good deal, though.

In short, it all depends on the lender you choose. So, take time to research more of them. And, aim at choosing the one that is trustworthy and reputable, and that offers fair interest rates and favorable borrowing terms in general.

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