Investing in commercial real estate is an excellent way to diversify your portfolio, but this type of investing can require more capital upfront than other types of real estate investing. A hard money loan can provide the funds you need to purchase commercial real estate. Before applying for a hard money loan, it’s important to know the pros and cons of using this type of financing for commercial real estate investing. Our experts have compiled this guide to help you understand the advantages and disadvantages of using commercial hard money loans for your investment goals.
What Is a Hard Money Loan?
A hard money loan is a type of financing you can get through a source other than a bank or credit union. Hard money lenders don’t use your credit score or financial history when deciding whether to approve your loan. Instead, they require you to use the commercial real estate you want to purchase as collateral. You might also be able to use other property you own as collateral for the loan. This makes commercial hard money loans appealing to many investors, especially those who need money quickly or are just starting in commercial real estate investing.
Of course, hard money loans have their downsides, and you should know what you’re getting into before deciding to take out a hard money loan to fund your commercial real estate investment. Let’s explore the good and bad about commercial hard money loans so you can make an informed decision.
Pros of Hard Money Loans for Commercial Real Estate
Choosing a hard money loan to fund your commercial real estate deal offers some key advantages.
Speedy Approval and Funding
Financing from a bank often takes months to approve, and banking institutions can require significant paperwork and documentation before finalizing a loan. In addition, you may have to wait a month or more for the funds to arrive after your bank loan is approved.
With a hard money loan, the approval process is much faster and doesn’t require the same level of paperwork. In some cases, a hard money business loan can be approved in as little as 24 hours. You also receive your funds quickly when you work with a hard money lender, with 10 days being the average turnaround time between loan approval and the funds arriving in your bank account.
Flexibility in Terms
Banks follow strict guidelines when loaning money to investors. Hard money lenders, on the other hand, don’t operate in accordance with the same restrictions, meaning that you can often negotiate the terms of your commercial real estate loan. Hard money lenders can offer more flexible terms customized to your investment, providing peace of mind for investors who understand that things don’t always go according to plan.
Less Stringent Qualifications
Hard money loans have simple qualification requirements compared with traditional bank loans. This type of loan doesn’t consider your creditworthiness or financial history; rather, it focuses on the value of your property. In fact, you can be approved for a hard money loan even if you have bankruptcies or liens on your record. As long as the value of your property justifies the loan amount, you can get the funds you need to make your commercial real estate deal happen.
Ideal for Short-Term Investments
Many investors use hard money loans for short-term investments. For example, a hard money loan could be your best option if you want to purchase a commercial property to rehab and then sell. These loans are also ideal for real estate investments that require you to move on a deal quickly because the funds are available to you sooner than if you waited for a traditional bank loan to go through.
Cons of Hard Money Loans for Commercial Real Estate Investing
It’s important to consider the disadvantages of using a hard money loan over a bank loan to fund your commercial real estate investment.
Higher Interest Rates
Due to the higher risk associated with a hard money loan, you can expect to pay more in interest for this type of financing. Currently, interest rates for a commercial bank loan are around 7% on average, but you could pay 12% or more in interest for a hard money loan.
Shorter Loan Terms
Commercial hard money loans generally have shorter repayment terms than traditional bank or credit union loans. Whereas you might have five years or more to repay your loan from a bank, a hard money lender will usually require you to pay off your loan within a year. While you can get more flexibility with a hard money loan, this type of financing is meant to be short term.
Potential for Higher Fees
All loans have origination fees that are due when your loan is approved. However, you can expect to pay a little more in fees for a hard money loan. Some fees you might be responsible for when taking out a commercial hard money loan are underwriting, documentation prep, loan servicing, and late payment fees. When gathering quotes from potential lenders, it’s important to ask about all the fees you might have to pay.
Is a Hard Money Loan Right for Your Investment?
A hard money loan could be right for your commercial investment if you need to move on the deal quickly and don’t have time to wait for the lengthy approval process of a traditional loan to conclude. You could also benefit from a hard money loan for your commercial deal if you have a low credit score or your financial history prevents you from securing financing through a bank. If you plan to invest in commercial real estate that you can sell quickly or refinance within a year, a hard money loan could be just what you need.
Let Titan Funding Help With Your Hard Money Loan in Boca Raton, Florida
Hard money loans can be useful to investors wanting to break into commercial real estate investing in the Boca Raton, Florida, area, though it’s important to consider their pros and cons before proceeding with this type of financing. If you need help deciding whether a hard money loan is right for your deal, contact the team at Titan Funding for personalized advice and solutions that can help you make the right choice.