Hard Money vs. Investor Loans: What’s the Difference?
One common question borrowers have about hard money loans is how they differ from a traditional, non-owner-occupied investor loan. There are some important distinctions to be aware of, especially for those who are considering either type of loan for a real estate purchase in California.
For starters, a traditional non-owner-occupied investor loan is typically issued by a bank or other large financial institution, rather than a private investor. These loans often do have the benefit of lower interest rates when compared to a hard money loan, but the advantages often stop there. Investor loans usually have long repayment terms (often as long as a conventional mortgage, so 15-30 years!), so borrowers will still end up paying more in interest when the deal is said and done. Furthermore, because these investor loans are funding by large banks and financial institutions, they often take longer to close. It is not unheard of for borrowers to wait months after having a loan application approved before they finally receive their funding. A hard money loan, on the other hand, can be closed on in as little as 7-14 days.
How Do Hard and Private Money Loans Differ?
Aren’t private money loans and hard money loans the same thing? Not necessarily. While almost all hard money loans are private, not all private loans are hard money loans. They do share some similarities, such as the fact that both types of loans usually have short repayment terms (a year or less, in most cases). They also tend to have higher interest rates as a result. What’s more, all private and hard money loans tend to assume more risk than a conventional loan because there are fewer credit requirements in place for borrowers. That’s where the similarities end, however.
The main difference is that with a hard money loan, the lender is its own financial institution and funds are drawn from a number of private sources. This differs from that of a private loan, where individual investors put up their own money and have a personal interest in each deal.
Other Important Facts About Hard Money Loans
By now, you may be beginning to feel like an expert on hard money loans, but there’s still a lot to learn! There are all kinds of important considerations you’ll want to keep in mind when you’re considering taking out a hard money loan. One of the most important things to think about is the personal guarantee you will provide to your lender. This is more-or-less a written promise that you will pay back the loan on the terms upon which you have both agreed. If you default on a hard money loan, there can be serious consequences that may impact the rest of your life and even put your personal assets at risk, so it’s vital that you have a solid understanding of what you’re agreeing to when you take out your loan.
Taking time to carefully research hard money lenders is a good way to avoid trouble down the road. Unfortunately, there are some dishonest lenders out there who are in the business to take advantage of people. When researching hard money lenders, be sure to check out a lender’s licensing information and read reviews from borrowers who have legitimately worked with them in the past. If there are any “red flags,” such as non-transparent loan terms, it’s probably best to move onto a different lender.
Residential vs. Commercial Hard Money Loans
Hard money loans are available for both residential and commercial properties in California. With a residential hard money loan, the money you borrow will be used to purchase a residential property; this could be anything from a standalone, single-family home to a duplex or something similar. With a commercial hard money loan, you will be using the money to purchase and develop a commercial property, such as an industrial warehouse, storage unit, or even a multi-unit residential property (such as a high-rise apartment building). Office buildings and retail space would also fall into this category. Often times, commercial hard money loans can also be used to purchase land for future commercial development.
Another main difference between residential and commercial loans is that the borrowing limit for commercial loans tends to be higher. This is because the costs associated with renovating or developing commercial property tend to be much larger than that of a single-family home or other residential property.
Considering a Fix and Flip Loan?
Those looking to buy and flip a home for a profit have many options available to them, including conventional mortgage financing. However, hard money loans tend to be one of the best options for those looking to take on a fix and flip property. That’s because the repayment terms on these loans tend to be shorter, so they can be paid back more quickly and borrowers can avoid having to pay long-term interest or being stuck with a loan. And because time is of the essence in most real estate flips, hard money loans are often a smart choice since funds can be disbursed in as little as a week after one’s application is approved.
Cost of Capital Considerations in California
In California, hard money loans can vary greatly from one county to the next and even one city to the next, especially when you consider how competitive the real estate markets can be in some areas of the state. With this in mind, the interest paid on a hard money loan can vary based on the demand and other factors. In California, the average interest rates for these loans ranges between about 7% and 11%. This may seem high, but borrowers will be happy to learn that California actually has some of the lowest interest rates on hard money loan in the entire country. This, along with many other benefits, makes hard money loans a great option for many borrowers out there.