The asset-based lending market has grown to more than $465 billion as of 2022. This large-scale growth has subsequently led to increasing demand for asset-based lending. As a result, more and more real estate investors are opting for hard money loans instead of traditional mortgages, while they put up their property as collateral.
By now, most investors are already aware that investing in real estate is arguably the most profitable way to develop wealth, while also diversifying their portfolio. However, it isn’t always easy to produce the cash required to make buy large, or even small properties. As a result, some people opt to invest passively through real estate crowdfunding or real estate investment trusts (REITs).
However, most people prefer to own their own property without any partners. If you’re one of those people, but don’t have a large sum of money or aren’t eligible for a traditional mortgage, a hard money loan might be a good option to consider. If you’re confused about how these loans work, here are 5 ways to use a hard money loan.
5 Ways to Use a Hard Money Loan
When most people think about hard money loans, they automatically assume that someone who is in desperate need of money is trying to borrow funds through any means. Besides, why would anyone opt to pay the high-interest rates that follow hard money loans instead of just going to the bank for a traditional loan if they aren’t in dire need of money at the moment?
While the desperate need for money is a common reason people opt for hard money loans, it is far from being the only reason. In fact, there are countless scenarios where a hard money loan may actually be beneficial for the borrower. Take a look at some of these reasons.
1. Expiring Contracts
If you’ve never had to deal with a buyer’s deadline, you will not be able to comprehend how truly nerve-wracking it can get. A buyer could lose their contract if they aren’t able to pay their dues. In such circumstances, borrowing hard money from a fast funding lender may be the only way for the buyer to save themselves from losing a contract. Doing so can help them save a lot of money in the future.
2. Short Term Liquidity
Sometimes, a property owner may need short-term liquidity until their hard asset has been liquidated. This happens when properties that have been inherited or gained through legal settlements require deferred maintenance or even repair in some cases. Generally, you will need hard cash on hand for this purpose.
Most banks and lenders won’t approve a loan against a damaged property, but that’s not the case with a hard money lender. By loaning out hard money against properties that are in need of repair or maintenance, you can gain short-term liquidity until the properties are eligible to be leased out or sold.
3. Loan Coming Due
A lot of the time, borrowers wait a long time to get their loans paid off. There could be a lot of reasons behind this, ranging from a critical financial situation to simply forgetfulness. Either way, it is something that happens more often than you’d expect.
However, the lender may not take these circumstances into account, unless there is an extreme case. Deadlines can sneak up on you at any time and you would be suddenly reminded that your loans are maturing or coming due. If this happens, the borrower will naturally start panicking about paying off the maturing loan. Hard money loans can be used in such situations until the borrower is able to refinance their loan.
4. Investing In Vacant Properties
You may be surprised to learn that most vacant properties are unable to qualify for a bank loan unless they are leased up. So if you’re looking to get a mortgage for a vacant property, there is a high chance that you’d get declined. Not only would this waste time, but it can also negatively affect your credit scores and make it even harder to get a traditional loan in the future.
Instead of risking this, you can approach a hard money lender. These lenders have no qualms in lending hard money for vacant properties as long as you can prove that you will pay back the money as well as the interest.
5. Other Business Purposes
In addition to making use of hard money loan when it isn’t possible to get a traditional loan, it can also be used for other miscellaneous payments that are required while running a business. Sometimes, you may find yourself struggling to meet the regular expenses.
Hard money loans can be used for short-term payroll needs, purchasing inventory, filling order materials, tenant improvement, expansion, and any other short-term payment when you’re running out of hard cash.
As you can see, there are a number of reasons you may opt for hard money loans instead of traditional bank loans. If you are looking to get a hard money loan, here are a few things to keep in mind.
- Find a Good Lender:Just like not all bank loans have the same benefits, not all hard money lenders work the same way. The quality, price, interests, and benefits can vary significantly from one lender to the other. So always do thorough research before choosing one.
- Choose the Right Property:Hard money loans aren’t the best options for all types of properties. Sometimes, it may be better to opt for a traditional bank loan, mortgage, or other methods of financial assistance. So make sure to weigh and pros and cons of every possible option before making a decision.
- Keep the Deadlines and Requirements in Mind:This goes without saying, but always comply with the requirements and deadlines set by the lender.
If you want further assistance on hard money loans, feel free to contact DFW Specialty Lending.