Real Estate Investing 101: Do Commercial Hard Money Loans Really Work?
Feb 21, 2017
Commercial real estate investors new and seasoned have many options in front of them for securing a commercial real estate loan. Although traditional commercial lenders have been the go-to, as commercial lending guidelines tighten, these lenders’ qualification processes have made it increasingly difficult to attain these loans.
One successful area that’s found growing popularity is an alternative to traditional commercial loans: Commercial hard money loans.
Alternative financing loans are what we do, so we know a thing or two (or more). We specialize in being able to fund on hard-to-place commercial real estate deals when other commercial lenders can’t. We believe that having a clear picture of what commercial hard money loans are will allow you to make the best decision down the line.
So let’s dive into what private money loans are and how they function, then offer some tips to decide if a hard money loan can work for you.
What are commercial hard money loans?
For any type of loan, the lender is taking on risk. How hard money loans differ from conventional commercial bank loans is primarily through how they mitigate this risk, but also through the increased risk hard money lenders take on by doing unconventional deals. After all, if you were lending $2 million, you’d want to ensure there were some ways to protect yourself from a default, too.
Traditional lending from private banking institutions focuses on the borrower’s ability to make payments over time, which is why they lean on figures like credit and payroll – this helps them determine if the borrower is likely to cover payments over time. This is why, as interest rates rise, so do the number of people who are turned away from traditional commercial loans. The qualification process becomes much more stringent.
Hard Money Commercial Loans
Commercial hard money lending, on the other hand, is a form of asset-based financing in which the loan’s value is determined based on the property put up as collateral. These loans focus on the value of that collateral, rather than the borrower’s credit or cash flow – the collateral protects the lender in case of a default, while encouraging repayment by the borrower. The qualification processes for hard money loans are a bit different, as well, but we’ll cover that shortly.
How Private Money Commercial Loans Work
We now have an idea of how money loans work differently than traditional commercial lending, so let’s take a look at a hard money loan in action.
A borrower should first identify the right lender to apply for this type of commercial loan. Not every hard money lender offers commercial loan programs, and not every lender will offer you the amount you’re looking for. Feeling comfortable with the lender you’ll be working with is important.
Borrowers should next identify the collateral they intend to use for the loan. Remember, hard money loans are first and foremost based off the value of the collateral. Most collateral includes retail property, industrial property, office buildings, apartment buildings, or non-owner occupied 1-4 family properties held by a LLC or under a corporate name. The exact documentation a hard money lender will need varies, but it ultimately needs to convince the lender of the value of the collateral.
Along with this documentation, lenders will require an appraisal or a broker’s price opinion (BPO) to determine the value of the collateral. The lender bases their loan off the LTV, or the loan-to-value ratio. If everything checks out, the hard money lender will finance the loan.
Things to Consider about Hard Money Loans
Now that you know how hard money loans work in action, we want to highlight a few points you should consider before you make your commercial lending decision.
1. Good Credit Isn’t as Important
If your credit history is preventing you from securing a commercial mortgage, hard money loans can be a helpful alternative. Good credit is always a plus, of course. However, asset-based hard money lenders (such as Riverdale Funding) are primarily concerned with the value of the commercial property being offered as collateral.
2. Hard Money Loans are Faster
For many commercial real estate investors, opportunities come up on short notice or require fast turnarounds. The traditional commercial lending process can take weeks, or even months, to complete. If your lending needs are time sensitive and you need to close on a commercial loan quickly, the hard money lending process is much quicker.
3. Terms and Interest are Different
Traditional mortgage terms range from ten to forty years, but hard money loans are much shorter – from one to three years. Interest rates associated with hard money loans tend to be much higher than traditional loans, so it’s good to be mindful of that. However, most experienced commercial real estate investors are comfortable with the tradeoff due to the shorter loan terms and speedier funding.
Do Hard Money Loans Really Work?
Hard money lenders help commercial real estate investors and business owners immensely in the growing number of situations where banks simply won’t lend. It goes without saying that hard money loans aren’t don’t suit every situation best – but hard money loans make things happen. And we’re always here to help.