The current buyer market in Orange County is flooded with real estate investors scrambling to get the best apartments before prices go up and opportunities to make profit. However, very few first-time investors know which financing options meet their needs when conventional lending companies use stringent requirements when qualifying loans. Fortunately, when banks fail, you can rely on private lenders like Money Lender Loans for hard money apartment loans.
What is Hard Money Apartment Loan?
Hard money is a loan that a conventional lender won't lend on a property. The asset's equity secures this type of loan. The commercial hard money loan is a short-term loan used to buy or renovate an investor-occupied commercial building before refinancing to a mortgage.
These loans are similar to commercial bridge loans in that they assist investors in closing fast and offering interest-only payments during the loan life.
Who are Hard Money Apartment Loans Designed For?
These commercial and industrial loans are tailored for both short-term and long-term venture capitalists who are looking to season or renovate an apartment before refinancing it to a mortgage. They can assist you in competing with cash buyers.
For instance, there is a ten-unit apartment for sale for $500,000 in your neighborhood. The building is distressed, and five units are vacant. It also requires repairs that will require approximately $50,000 and has housing fines of $25,000. That is $75,000 that needs to be paid.
There is also a similar building for sale in the neighborhood that isn't distressed going for $700,000. Therefore, if you purchase the apartment for $500,000 and take care of the $75,000, you will make equity of $125,000.
A conventional lender such as a bank will not accept this arrangement because the building is not making adequate income with the fifty percent vacancy. On the contrary, a conventional lender will lend you the money, although not as much money as a traditional lender. They could give you approximately sixty percent of the total project expense (this includes the buying price, repair costs, and fines), which is $345,000. That means you will be required to take care of the 40% deposit or $230,000.
Assuming you get the $230,000, the goal to pay the fines and repairs and later rent the asset again at one hundred occupancy rate is realized. After your apartment stabilizes, it becomes ready for a more long-term financing scenario.
Different Categories of Properties Funded by Hard Money Apartment Loans
Generally, the loans in question are used to finance two categories of properties:
- Fix-and-flip properties and
- Those that long-term venture capitalists want to purchase, rehabilitate, and rent.
Both kinds of assets require to be fixed up but using diverse exit strategies.
A fix-and-flip investor will purchase an apartment, repair it, sell the apartment, make profits, and pay off their loan. Whereas a long-term real estate investor, will purchase an apartment that requires a few repairs, work on the repairs, season the property with tenants and then refinance the asset into a conventional loan.
Hard money apartment loans are used to finance condos, two homes, multifamily properties, and single-family houses. Usually, the loans are available to fund apartments in any condition in ten to fifteen days.
Why Should You Consider Hard Money Loans?
Hard money loans are expensive compared to conventional loans, but why are they worth considering? Discussed below are the advantages of these loans:
- Easily accessible
Since lenders are more concerned with collateral than the borrower's financial position, hard money apartment loans are easily accessible. Your lender will not go through the loan application process that involves reviewing your bank statements and verifying income. Once you establish a good relationship with the lending institution, the process moves fast, allowing you to close deals more quickly.
- Flexibility
Hard money real estate loan agreements are also flexible. This is because your lender will not use the standard underwriting process. Instead, they analyze every deal individually. There are instances you can tweak things such as repayment schedule.
- Approval
As previously noted, collateral is the most crucial factor in hard money apartment loan. As a result, if you are purchasing an apartment, a lender will be willing to lend you as much as the asset's worth. And if you borrow using another asset as collateral, the value of that asset is what your lender will care about.
Moreover, some lenders will not review your credit.
- You don't Require a Strong Credit History
You do not need a good credit score or a lot of financial documentation to obtain a loan. Unlike conventional mortgage underwriting that focuses on a borrower's credit history and income, hard money lending companies give loans based on collateral. As a result, your lender should know the apartment's anticipated market value after the proposed renovations are done. The estimates are known as after repair value (ARV).
Commercial Hard Money Interest Rates
Hard money apartment loan rates aren't set by government-backed loan agencies or prime rate but by every private lender. The rates are influenced mainly by your project and apartment's equity and the supposed project's risk. This underwriting flexibility allows lender set rates as well as finance projects that would not get loans. The higher your risk (apartment condition, borrower experience, and high loan to value ratio), the higher the interest rate charged. Additionally, since hard money lending companies are mainly available to lenders, they aren't controlled like traditional loans.
Because of the level of risk involved in hard money apartment loans, the interest rate is higher than traditional loans. Generally, the interest rates range between 7.5% and 15% depending on the perceived risk and the lender. Points, on the other hand, range from two to four percent of the amount borrowed.
It is worth noting that these types of loans are interest only and the principal is due at the end of the loan term. Hard money real estate loans are short and range from one (1) to three (3) years.
What are the Maximum Loan Amounts?
The maximum loan amount is not set by the Federal Housing Administration (FHA). Instead, the lending firm uses after renovation value of the asset and the apartment's loan to value. The lender determines what their interests are and then set their guidelines based on the interest.
That said the lender determines the maximum loan-to-value (LTV) and after renovation value (ARV). Typically, the maximum LTV and ARV are 90% and 75% respectively. These numbers give the amount of down payment. If the maximum LTV is ninety percent, the down payment is ten percent. Down payment can be defined as the portion you are responsible for.
Hard money rates can be affected by factors such as:
- Exit strategy
A well-defined exit strategy is needed for this type of loan, and you should have equity. An exit strategy is tossing the asset and refinancing in a traditional investment asset loan or paying the hard money apartment loan.
It is essential since it defines the duration at which the lender will have their funds at risk. Investors who intend to sell the apartment immediately represent a reduced risk to lending companies compared to investors who plan to hold the asset for long.
- Loan to Value Ratio
Loan to value ratio will mainly determine the amount of risk to the lending institution. Typically, the risk is lower if you have more of your money invested in the transaction. For instance, if the apartment is worth $200,000, and you borrow $150,000, the loan to value ratio is seventy-five percent. If instead, you borrow $130,000, the loan to value ratio is 65%. Assuming everything is equal, the sixty-five percent LTV will get a lesser interest rate compared to the former.
- Your Region
Interest rates also vary depending on the state or region. There are two kinds of lenders: small lending companies that operate in a small geographical area and nationwide. Nationwide lenders have varying interest rates depending on your apartment's location.
Also, competition plays a huge role in interest rates. For instance, lending institutions in California charge lower interest rates compared to other states. This is because the state has numerous hard money apartment lending institutions.
How to Become Eligible for Hard Money Apartment Financing
Applying for a hard money loan is not overwhelming. Nonetheless, it is crucial to take time to learn and understand how the process works. To apply for the loan, you will require comprehensive details about your financial equity or holding and current monthly income.
Moreover, you should be ready to discuss the apartment you want to purchase with your lender. Be sure to prepare a comprehensive business plan that indicates how the asset will make income. If you need fix-and-flip funding, make sure you have information on the necessary repairs and their costs. The more you understand about the asset, the better placed you are to make use of it.
To obtain a hard money real estate loan, you should have a property that the lending company deems valuable and of potential profitability. You should research the asset, property value, and neighborhood, among other factors to determine if the deal is a worth flip prospect.
Hard Money Real Estate Loan Application Process
Any renowned lending company offers borrowers an online application portal for uploading the necessary forms and information. This not only streamlines but also speeds up the lending process. Discussed below are the essential application information and the timeline for hard money real estate loans.
The loan application procedure can be classified into two:
- Prequalification Phase
You should use the prequalification phrase to get an understanding of your potential loan. Once you know your potential funding size, fees, terms, and costs, you should use those details to set your maximum budget as well as go ahead with buying the apartment.
Your lender will use this phase to assist you in compiling your loan options, analyze financing choices, and compare various offers.
During this stage, you are expected to provide:
- Your personal bank statements for two to three months,
- A credit score that is above 550, and
- Answers to questions regarding you and your investment apartments like the desired apartment's address and expected loan amount.
These details will help your lender give you a list of hard money apartment loan options. Additionally, the lending company will provide you with a pre-approval letter that you can provide the apartment real estate broker or seller. The letter conveys a message that you are eligible as well as can afford buying the apartment.
- Funding Phase
A hard money loan application is approved during this phase. To make the final decision, your lender will request more specific details. If approved, your lending company will issue the fund, permitting you to close the deal.
Different from the prequalification and pre-approval stage, the funding stage is more intense. This is because the lending firm thoroughly analyzes your financial stand as well as reviews your documents to determine if you are worth the risk of lending the money.
Moreover, the lender will decide if the apartment is one that they would like to invest on grounds on its ARV, neighborhood, renovation costs, and buying price. Typically, your lender will use credit reputation, collateral, and capacity to decide if they will finance your project.
During the funding phase, lenders will pay attention to the following documentation:
- A signed contract which has the purchase price and the buying agreement between you and the property seller,
- A list of previous projects as well as ownership proof,
- Scope of rehabilitation project if you plan to renovate an investment asset,
- If you are a first-time real estate investor, the lender will permit you to work together with an experienced contractor. As a result, you will be required to include contractor bids in your application process.
What Do Hard Money Lending Institutions Look for in Borrowers?
Hard money apartment loans are ideal for borrowers with poor credit. Their approval rate is also fast. This is because unlike traditional loans, they do not get bogged down in a lot of paperwork. However, that does not mean lending institutions give loans out like candy. There are still numerous things that lenders look for in borrowers. They include:
Skin in the game
The first thing lending institution will look for in a borrower is a person who is ready to put up a large down-payment. The down-payment will serve as a guarantee that you, as a borrower, stand to lose should the project fail. This is the reason most hard money lending companies offer low LTV ratio. Additionally, it makes sure that the loan has adequate equity to be paid off in case of a foreclosure.
If you do not have money to contribute to the project, you can look for a partner or another investor to provide the down-payment money.
Motivation to Repay the Loan
Additionally, your lender is interested in your exit strategy. This is because the lender wants you to repay the loan so that they can lend out the money to another borrower instead of having the money tied up in a foreclosed apartment for long.
Ability to Repay
Hard money lenders pay a lot of attention to the income-generating potential of the apartment securing funding. That means you should show the lender that you have a viable plan.
Frequently Asked Questions
- Are Commercial Hard Money Apartment Loans Safe?
No government agency backs hard money apartment loans, and as a result, they are not regulated. Nevertheless, there are several renowned lending companies in California, so it is essential to select a reliable lender.
- What is Floating Rate?
A floating rate can be defined as the interest rate, which isn't fixed but adjustable or variable. It could rise or go down depending on the loan's duration or market. For instance, if the floating rate is at prime plus 3%, and the prime is 5%, the floating rate will be 8%, but only when the prime rate goes up.
- What are Points?
Points on hard money apartment loans are the charges charged by lenders for lending the money. Generally, every point equals one percentage point of your loan. They are negotiable and vary. They could also be in addition to your loan origination fee and will appear in the closing costs.
- What is the Definition of Fixed Rate?
It is the interest rate, which remains the same throughout the loan's duration. It is not affected by the market.
- What Happens if Default on Your Loan?
If you default on your loan, the lending institution will take the property's possession. The lender will then sell the asset at what is thought to be the market value before the funding was granted. Your lender may not report you to the credit bureaus.
Alternatively, the lender will do a deed in lieu of foreclosure. Here you give the asset to the lender, and there will be no foreclosure appearing on your credit report.
- What Should You Do When Your Exit Strategy Fail?
You can use an alternative source of cash as an exit strategy if something unanticipated happens and throws off your original plans. It's possible to use money from the sale of another asset, other investment working capital, or another hard money apartment loan. Although this may not be the best strategy because it diverts funds from the intended use, it will buy you ample time to improve your apartment's income-generating potential.
Find A Reliable Hard Money Loan Lender Near Me
If you're a less qualified borrower, a hard money apartment loans is the only viable method to fund your short-term business goals. However, you need to do due diligence before borrowing; working capital is not worth it if it puts other valuable properties at risk. Fortunately, there are many reliable lenders in Orange County, like Money Lender Loans and resources that can help you make the right decision. To get answers to your questions, contact us at 949-409-4372. That way, you will be confident that your real estate business will grow.
