Invest or Avoid—Should You Use Hard Money Loans for Rental Properties?

by HMLS

The current surge in homeownership prices has given quite a boost to the rental market. Buying rental properties is one of the most lucrative real estate investments right now if you want a long-term stream of passive income along with capital appreciation.

Investors have been taking out both traditional and hard money loans for rental properties, but there is not much information about the viability of the latter. For example, an average property buyer may consider a hard money loan as an expensive borrowing tool to be avoided at all costs, when in reality, it can fast-track their way to a good investment opportunity.

In this guide, we’ll talk about the overall practicality of hard money loans for real estate investors, focusing especially on rental purchases.

Hard Money Loan for Investors—How Does It Work?

Hard money loans are short-term loans offered by private lending institutions or individual investors. The outstanding on these loans is 100% secured by the borrower’s existing property or the one they’re going to purchase, unlike traditional loans that are backed by a combination of collateral and the borrower’s credibility.

Take any traditional lending scenario of financing a purchase of a property—the inflexible documentation and verification requirements drastically slow down the proceedings. A client will typically wait about 30–90 days to go through various approval channels and even longer to get access to the funds. The wait time isn’t conducive to investment because of frequent pricing fluctuations and the presence of other competitive investors.

Source: chris robert

Hard money loans are processed faster than conventional loans because the lender doesn’t spend time going over paperwork regarding the borrower’s financial history, debt-to-income (DTI) ratio, and income source. In most cases, they check the property served as collateral and service the funds within two weeks or less. The convenience attracts three kinds of candidates:

  1. General, in-dire-need businesses or individuals who don’t qualify for traditional loans
  2. Investors who have maxed out their DTI ratio and cannot apply for traditional funding until they’ve settled some debts
  3. Savvy investors looking to bypass the bureaucratic entanglements of traditional lending guidelines and fund a deal quickly

Hard money loans have 1.15 to 3 times higher interest rates (between 8% and 22%) than what’s charged in a traditional setup, which is a fair trade-off considering the high lending risk they tolerate.

The Core Functionality of Hard Money Loans for Investment Property

The general perception among new investors is that since hard money lenders charge more interest, they can create a burdensome financial obligation—but the truth is that the short-term nature of these loans fits most real estate investments perfectly.

Property flippers are some of the most regular users of hard money loans. They lock in a good deal with timely hard money funding, finish the repairs, and put the property on the market within a year. They earn a large spread when it finally sells, enough to cover the loan and borrowing costs while keeping a cushy profit—all thanks to the speed and convenience at which they had funds at their disposal.

The effective hard money interest rate for short-term deals is usually only a percent or two higher than traditional loans, so your return on investment (ROI) typically stays high. The problem arises when you cannot sell the property quickly and have to commit to monthly interest obligations without having the cash inflow to keep up.

The situation is similar with rental property investments—your cash inflow (rental income) is not in a lump sum. Does it make sense to use a hard money loan in this case, and can you expect a solid ROI on such deals, though? Get a better understanding of it in the following section.

Source: Tima Miroshnichenko

Is Choosing a Hard Money Loan for a Rental Property a Good Idea?

When someone takes a hard money loan for a rental property (or any slow-selling property, for that matter), it’s mostly because they want to claim the investment before someone else does. The loan acts as a temporary or bridge loan before the borrower qualifies for a traditional refinance loan with a low-interest payout. The viability calculation is pretty basic—you pay a little extra in interest for a few months to earn high capital and rental income returns down the line.

The question of essence is—what if you cannot refinance quickly? You’ll be paying the high interest rate for two to three years, five at most, if you consider long-term hard money loans. Will you still hold a solid ROI while keeping the repeated interest outflows? You cannot have a one-size-fits-all ROI estimate for hard money rental loans because there are many variables to consider with each property. The general rule is that if your ROI prediction is greater than your interest rate, you should consider taking the loan.

How To Calculate the ROI of a Hard-Money-Financed Rental Property

Investors use different formulas to calculate ROI, but the essence is how much you’re gaining on your investment. To calculate the ROI of the hard money-financed rental property for any particular year, you need to know:

  • Your original investment
  • The profit value for that year (independent of the investment element)

Let’s understand with this no-frills exampleYou find a $200,000 rental property for sale. You go to a hard money lender who offers 70% LTV at 10% interest per annum, which means they finance $140,000 (70% of $200,000), and you bring $60,000 of your own money as a down payment. Before you rent out to tenants, you spend $10,000 on the property for repairs.

Now, you earn $2,000 per month in rental income, while your yearly interest obligation is $14,000.

Here’s how you’ll calculate your ROI:

ComponentDetails
Cost of investment—your capital investment before the property began generating an incomeDown payment—$60,000
Repairs—$10,000
Total—$70,000
Net profit—the difference between your annual rental income and interest obligationRental income
($2,000*12)—$24,000
Annual interest—$14,000
Net profit—$10,000
ROI ($10,000 ÷ $70,000)*10014.28%

This would be a profitable deal for you because the ROI is more than the interest rate (10%). If your ROI falls below 10%, the investment won’t be profitable anymore.

Source: Kindel Media

Are All Hard Money Lenders Open To Rental Investments?

Most hard money lenders are ready to finance the purchase of a rental property, provided it qualifies as collateral. A lender would typically check:

  1. Average rental rates of the location
  2. Current or future market value of the property
  3. Projected cash flows during the potential loan tenure

Hard money lenders don’t go too deep into the borrower’s financial history, but when it comes to first-time property investors, they may want to see some basic credentials to ensure the investment won’t go cold.

As a borrower, you should look for well-rated lenders offering low interest rates that would positively impact your annual ROI. If you’re going to refinance soon, work with a lender who has lenient prepayment terms, more specifically, a low penalty charge if you repay before the tenure or loan seasoning period.

Hard Money Loan (HML) Solutions Offers Hard Money Rental Property Loans at the Lowest Interest Rates

Rental properties are one of the most stable investments for passive income—they’re not as volatile as stocks and always stay in demand. If you’re hesitating about a rental investment because of fund shortage, reach out to Hard Money Loan (HML) Solutions for help. The lending group specializes in financing real estate transactions in Florida, accepting all kinds of properties as collateral, including:

  • Single-family housing
  • Apartments
  • Condos
  • Townhouses
  • Commercial land
  • Business-purpose structures

HML Solutions is a group of veteran investors and entrepreneurs on the lookout for lucrative investment deals and healthy opportunities to diversify their portfolios. Being an independent lending group, they fund clients who bring an attractive real estate deal and have enough equity investment.

Source: Jack Sparrow

HML Solutions charges the lowest rates in the industry, so you can secure one of the best ROIs for your rental property if you’re thinking long-term. The rate depends on how much LTV (loan-to-value) ratio you need. Take a look at the primary components of an HML Solutions loan package in the table below:

Loan ComponentsHML Package
Interest rate9.99% to 12%
Rate typeFixed
Principal$100,000 to $50,000,000+
Term1–3 years
Installment typeInterest only
LTV offeredUp to 70% of the purchase price or the appraised value (whatever’s lower)
Funding time3–14 days
Origination fee2 points or 2% of the principal amount of the loan
Prepayment penaltyNo penalty if repaid after 6 months
Down payment depositNot required

How Fast Can You Get Approved for an HML Solutions Loan?

HML Solutions handles every applicant on a case-by-case basis, but most deals are funded within 3–10 days. The approval process consists of the following three stages:

  1. Phone call—You fill out a quick online application form to request a phone call. A lender will then call you to discuss your collateral, business, and other generic details of your deal
  2. Appraisal—The HML team will appraise your property and evaluate the lending risk to determine the LTV ratio they can afford. Once a package is mapped out, you’ll get a loan offer with transparent terms and conditions
  3. Closure—If you decide to go through with the loan, the HML team will take care of the paperwork and title work

What Is the Service Quality Like at HML Solutions?

HML Solutions runs an efficient and service-driven lending business. It has a 5-star Google rating, which is quite a feat in the lending industry. Many client reviews commend the group for practicing a quick response time and securing funding even in hard-to-lend scenarios. Here are some major benefits of choosing HML Solutions:

  • Tailored packages—No two real estate borrowers are alike, so HML Solutions customizes every loan package to suit the client’s financial capacity
  • Light paperwork—HML lenders ask for the property and business papers. They won’t pester you to bring documents like bank statements, tax returns, or even a social security card
  • Long-term business relationships—Whether you are a new or seasoned property investor, the HML team is well-equipped to support you, deal after deal. They offer excellent consultancy services, so even if your application is rejected, you can reach out to the lenders for bona fide advice to forward your situation
  • Lenient treatment—HML lenders value ethical communications. If a borrower is worried about defaulting, they can talk to the team to discuss an alternate repayment schedule. HML Solutions doesn’t foreclose on defaulters unless there’s absolutely no other option

Source: maitree rimthong

Can HML Solutions Service Loans for Non-Rental Situations?

HML Solutions extends lending services for any purpose. Beyond real estate transactions, the group offers flexible hard money loans for:

  • Purchase of business assets
  • Business acquisition
  • Construction and reconstruction
  • Refinancing
  • Cash-out financing
  • Short selling
  • Home renovation/rehab
  • Fix and flip deals
  • Foreclosure and REO (real estate-owned) deals
  • Startup funding
  • Commercial projects

Take your investment portfolio to the next level—apply for a tailor-made loan package with Hard Money Loan Solutions today.

Featured image source: Ivan Samkov

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