Investing in real estate can be profitable, and an easy way to build wealth. It’s a very effective strategy that will help you diversify your portfolio. You can invest passively through real estate crowdfunding and real estate investment trusts (REITs). However, some people prefer to own the property directly. If you don’t feel comfortable in parting with a substantial amount of money upfront to buy real estate, then NYC hard money loans can help you.
NYC hard money loans have advantages compared to traditional financing. However, it also has its potential downsides. For you to find out if this type of loan is good for you, you have to understand how it works first – why do people use it?
NYC hard money loans: How does this work?
NYC hard money loans, or usually referred to as bridge loans, are short-term lending instruments that are used by real estate investors. The purpose of this type of loan is to help finance an investment project. It’s often a tool for real estate developers of house flippers whose objective is to develop or renovate a property. Once the renovation is done, then they call the property for a profit.
Hard money loans aren’t issued by mainstream financial institutions, but rather, they are issued by private lenders. And unlike traditional bank loans, obtaining hard money financing isn’t determined by the creditworthiness of the borrower. Instead, hard money lenders use the property’s value to determine whether or not to make the loan. After all, the lenders focus on the ARV or after repair value of the property, which is an estimate of how much the property is worth once the development or renovation phase is completed.
Why do people use hard money loans?
There are several reasons why people use hard money loans, and these are the following:
- If you need funding fast – Typical banks will take months to review your loan application – and that’s a lot of time. Hard money loans reviews can only take one day, and funding can take 3 to 5 days. During emergency situations, funding can only take one day.
- If the property isn’t stabilized – Sometimes, time isn’t the problem. It’s just that the traditional bank won’t finance the actual property. A few examples include a property that is missing a certificate of occupancy, needs rehab or doesn’t have a strong rental history. But hard money lenders can fund properties that traditional banks can’t.
- If your credit score is poor – Hard money lenders aren’t as strict as traditional financial institutions. They understand the events that could negatively influence one’s credit score. Therefore, they focus mostly on the property’s value instead of the debt-to-income ratios or FICO score when they consider funding one’s loan.
- If you don’t want the loan to be under your name – Traditional financial institutions are most likely to require that a property is owned directly by an individual they’re making the loan to. If you own too many properties for a bank to finance you personally, or if you want to own a property in an LLC, then your best option is to use NYC hard money loans.
Pros and cons of using NYC hard money loans
To help you determine if you’ll benefit from hard money loans, it’s best that you weigh its advantages and disadvantages.
The pros
There are a lot of good reasons why you should get a hard money loan instead of a conventional mortgage from a financial institution. Below are the primary benefits of this type of loan:
- Convenience – Applying for a mortgage takes a lot of time, and that’s because of the new regulations on mortgage lending, as part of the Dodd-Frank Act. Because of this, it can take months to close on a loan. This means that investors are at risk of losing out on an investment property. But with NYC hard money loans, you can get funding in a matter of days. This is important if you’re funding a large-scale development project.
- Collateral – With a hard money loan, the property usually serves as collateral for the loan. Although lenders may allow investors a bit of leeway. For example, some lenders may allow you to secure the loan using your personal assets, like a residential property or a retirement account.
- Flexible terms – And since hard money loans are offered by private lenders, this gives investors more room for negotiation of the loan terms. You can get certain fees like the origination fee, reduced or even eliminated during the underwriting process, or tailor the repayment schedule to your needs
The cons
While hard money loans have advantages, they aren’t always the perfect financing solution. Here are two main disadvantages you should consider:
- Cost – Hard money loans are convenient, but investors will have to pay a price to borrow money this way. The rate can go up to 10% higher than conventional loans. Loan-servicing fees, origination fees, and closing costs are likely to cost the investors more money.
- Short repayment period – The objective of hard money loans is to allow investors to obtain a property to go on the market as soon as possible. Because of this, these loans feature much shorter repayment terms compared to traditional mortgage loans. So, when choosing a hard money lender, you need to have a clear idea of how soon the property becomes profitable to make sure that you’re able to repay the loan timely.
NYC hard money loans are a perfect fit for wealthy investors who need to get funding quickly for an investment property, without any problem that goes along with traditional bank financing. When evaluating hard money lenders, you need to pay close attention to the interest rates, fees, and loan terms. If you have to pay for too much or cut the repayment period too short, then it can influence how profitable your real estate venture is in the future.
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