Types of Investor Loans
Hard Money Loans
Hard money and private money are two terms used interchangeably in the real estate financing world amongst investors. The differences are subtle. The main difference is, a private money loan is usually with a private investor, most likely someone you know (family member, friend, family friend, coworker, etc.). A residential hard money loan is generally with a company. I’ve found private loans to have fewer if any points. Hard money loans can have anywhere between 1 and 5 points up front. They are both loans used to buy a real estate investment quickly and when the property or borrower wouldn’t qualify for a traditional bank loan. The loan is secured by the real estate company in a 1st lien position. Rates and fees for this type of loan are higher than a conventional loan and are typically short term. Hard money loan terms are usually between 6-24 months
Fix & Flip Loans
If you’re buying a property with the intention of renovating and flipping it you’ll want this type of loan. The loan is secured by the property. They are short-term private lender loans or hard money loans. They’re at a higher interest rate than traditional bank loans that usually have interest only payments or payments that are tacked on to the end of the term. As an individual looking for a loan, it can be difficult if you have no tax return. Investor loan options will be limited to these higher interest deals. They can be funded quickly, which is hugely important in today’s real estate market.
You can make “cash offers” if you have a good hard money lender because they’ll be able to fund your deal in the same amount of time as if you had cash. They also allow you, as a real estate investor, to qualify easily for multiple loans at the same time as the underwriting is done on the investment and not the borrower (well, mostly on the investment and a little bit on the borrower). Good luck trying to get a traditional bank to loan you money on one Fix & Flip project let alone several at the same time.
Make no mistake, this is expensive money but if it’s the difference between flipping a property and making X dollars and not being able to buy it in the first place… it’s a pretty easy decision. You can usually get a pretty high LTV (loan to value) on the purchase and rehab costs which means you have to come up with less out of pocket at closing. But, you must have a plan and work quickly because the clock is ticking and the faster you finish and flip the more profit you make.
Commercial Hard Money Loans
These are asset-backed real estate investor loans, which means the lender is looking mostly at the asset rather than at you, the borrower. The borrower is an individual or a company looking to purchase a commercial property quickly or pull money out of a commercial property. These investment property loans can be made on any variety of commercial properties: multi family, office, self-storage, retail, mobile home parks, warehouses and mixed use. Rates are higher and terms are shorter than traditional banks but very useful for borrowers that need capital quickly or would have trouble qualifying under normal underwriting.
New Construction Loans
New construction hard money loans are asset-backed loans secured by real estate. The borrower taking out this type of loan is doing so because they are unable to get a conventional loan from a bank or they can’t wait for a bank (banks take a loooong time to underwrite, approve and fund). For this reason, these types of loans have a higher interest rate. Funding can be for land and building costs but lender will require borrower to put some cash into the deal due to the higher risk associated with this type of loan. Lender will require project plans, budget and timeline. Lender will work out a draw schedule and require inspections along the way to determine when certain milestones are hit.
Refi or Cash-Out Refi Loans
Refi or cash out refi loans are loans in which the borrower owns the property and is looking to refinance it to either get a better rate, better term or pull some equity out. A straight refi loan is when you refinance the existing loan amount. A cash out refi loan is when you refi into a larger loan, pulling the difference out in cash for you, to be used on renovations, or to buy more real estate. Lenders will loan a certain % of LTV or Loan to Value, meaning a loan amount up to a certain percentage of the market value (appraised value) of the property. If this is a loan with a hard money lender or direct lender or asset based lender, the rate will be higher but approval will be easier.
Bridge loans are used by commercial investors to meet immediate cash flow needs when there is a gap between the demand for cash and its availability. This type of loan “bridges” the gap. They can also be used when an existing hard money loan or fix & flip loan is nearing the end of its term and the borrower has not yet stabilized the property or finished adding the value they were planning on in order to sell it or refinance into a permanent long term, low interest loan. The bridge loan buys time. It is expensive money but usually longer in duration than a fix & flip loan or straight hard money loan. Terms can range from 6 months to 24 months.