A hard money loan can get your real estate venture off the ground, but the drawback is that this loan will probably have a short term. Since you will need to pay back your loan quickly to avoid defaulting on the loan and your new property, you will need to be thoughtful when you are making an exit strategy. There are several exit strategies to explore.
How Do I Ensure That I Can Repay a Hard Money Loan?
When you are applying for a hard money loan, it’s smart to also start planning for your exit strategy. Ideally, you will want to be able to pay off your loan as quickly as possible to avoid losing the property or defaulting on the loan, both of which can hurt your credit in the long term. Smart real estate investors will have a few exit strategies planned, just in case your financial circumstances or your plans for the property change. The best exit strategies include:
Refinance Your Loan
If you don’t intend to fix and flip your new property, it could be a good idea to refinance your loan. For real estate investors who want to keep a rental property, refinancing your loan will give you more time to pay the loan back. This exit strategy involves refinancing your loan with a traditional lender instead of a hard money lender, which can extend the term of your loan, so you can make smaller monthly payments over a longer period of time.
Refinancing your loan with a traditional lender, such as a bank, may be part of a larger strategy for your real estate investment goals. Sometimes, hard money loans can work as a bridge loan that allows you to purchase a property quickly while you are waiting for approval from a traditional lender. Once you have secured a traditional loan, you can refinance that loan to include the remaining amount you owe your hard money lender.
Sell Your Property
One of the easiest exit strategies is to simply sell your property. If you purchased a property to complete a fix and flip project, you can quickly repay your loan with the profit you make from selling the renovated property. Using this strategy will ensure your loan is repaid completely. However, if renovations are still taking place on the property, you may be able to ask your lender for a short extension until the property is sold.
Many real estate investors use money from a hard money lender to pay for the cost of renovation on a property, which then enables the property to be sold at a higher price to match the new value of the property. The return on this investment can easily repay your loan and put money in your pocket for your next investment. Sometimes, a real estate investor may use this profit as momentum to apply for a new loan to purchase a new property.
Apply for a New Loan
In some cases, you may want to find a new hard money lender to repay your current loans. Swapping one hard money lender for another is usually a final resort if other exit strategies have not worked. Just like your original loan, your new loan will likely be short-term, so you will need to have a plan in place to repay this loan, as well. This strategy is more appropriate if you are trying to avoid foreclosure on the property.
Keep in mind that continually swapping one hard money lender for another might make lenders hesitant in the future, which makes this a risky long-term strategy for your real estate goals. Loan applicants who have poor creditworthiness from being unable to pay back loans on time are less likely to get loans in the future.
Secure a Mortgage
You may also want to consider securing a traditional mortgage. Just like refinancing your loan for a traditional loan will extend the amount of time you have to pay off the loan, a mortgage on the property also gives you more time. Securing a traditional mortgage is ideal if you intend to live on the property instead of renting the property or selling it immediately.
If your traditional mortgage application was initially rejected, and you asked a hard money lender to fund your home purchase, you can use the term limit on this loan to fix your creditworthiness. In the one to three years when you are paying back your hard money lender, you can work on building your credit or improving your credit score so that you can be approved for a traditional mortgage, which can then be used to pay for your home.
Use Your Business Capital
You may also be able to use your business capital to pay off your loan. This strategy is a good option for real estate investors who are gaining income from other properties, such as previous fix and flip properties or properties that earn rental income. Your business capital can be used to pay off your loan without the need for refinancing. You can also find other investors to help pay off your loan if you have other long-term real estate investment goals.
What Are the Advantages of Finding a Hard Money Lender?
Whether you’re new to the real estate game or you are a seasoned property flipper, there are several advantages to finding a hard money lender. The main advantage of hard money lending is the speedier approval process, the loan term flexibility, and the less demanding underwriting process that usually occurs with a traditional loan or mortgage.
Another major advantage of using this type of loan is the fact that the approval for the loan is based on the value – or projected value – of the property, rather than your credit history. While other loans rely much more heavily on your credit score, a real estate investor with a mid-level credit score can still secure a loan to purchase a property if the property shows promise of making a profit.
What Are the Loan Rates Like?
Every loan has an interest rate, which may be important to you since the interest on the loan can mean you are paying more than you originally owe. A conventional mortgage will typically have a much lower interest rate than a hard money loan, which can have an interest rate of 8% to 15%. However, because these loans are significantly shorter, you may not be overpaying your loan at the end of the loan period.
The expense of this loan may also be influenced by the loan-to-value ratio for the lender. Some lenders will only agree to fund part of the property purchase, which means you will need a higher down payment to buy the property. If your lender only agrees to pay 80% of the property value, you will need to bring a 20% down payment to the table to close the loan.
If you want to buy a property quickly, it’s a good idea to find a hard money lender. But when you apply for this loan, it’s best to have an exit strategy or two in place since the loan term will be much shorter than a traditional loan. Get in touch with Turning Point Lending today to learn more about the best way to repay loans.