Hard Money Rehab Loans: A Complete Guide for Real Estate Investors

Hard money rehab loans have become an increasingly popular financing option for real estate investors looking to renovate and flip properties. Unlike traditional bank loans, hard money lenders focus more on the asset and project rather than the borrower’s credit score and income. This makes them ideal for investors who want to take on fixer-upper properties that need significant repairs and upgrades.

In this comprehensive guide, we’ll explain everything you need to know about hard money rehab loans, including how they work, their benefits, loan terms, costs, and how to qualify for one.

What Are Hard Money Rehab Loans?

Hard money rehab loans are a type of short-term financing provided by private lenders and funded through private capital. The loans are asset-based, meaning they are underwritten based on the projected value of the rehabbed property rather than the borrower’s financial profile.

Hard money lenders provide these loans to real estate investors who want to purchase and renovate distressed or outdated properties The loans provide the capital needed to finance the purchase and cover the rehab costs to fix up and increase the property’s market value

Once the renovations are complete, the investor can sell the property for a profit or refinance into longer-term financing. Hard money rehab loans serve as a bridge to get the deal done quickly

Benefits of Hard Money Rehab Loans

There are several advantages that make hard money rehab loans appealing financing options for real estate investors:

• Speed and simplicity: The application and approval process is much faster than traditional bank financing. You can receive funding in as little as a few days. There is less paperwork and rigorous qualifications.

• Higher loan-to-value (LTV) ratios Hard money lenders can finance up to 80-90% of the purchase price plus rehab costs compared to 75% for conventional loans This allows investors to take on deals with less money out of pocket

• Flexible terms: Loan terms are structured on a case by case basis so they can be customized to your project’s needs. You can obtain interest-only payments for rehab periods.

• Keen focus on the deal: Lenders base approval on the projected property value rather than your finances. This gives flexibility to take on deals even with poor credit or income.

• No prepayment penalties: You can pay off the loan early with no extra fees or charges. This helps once you sell or refinance the property.

• ** Ability to tap equity:** If you have existing properties with equity, you can use a hard money loan to tap into that equity to fund new projects.

How Do Hard Money Rehab Loans Work?

Hard money rehab loans have a relatively straightforward process compared to traditional bank financing. Here is an overview of how these loans work:

1. Find and evaluate a property: Identify a distressed or outdated property priced below market value that has rehab potential. Estimate costs.

2. Submit a loan application: Provide details on the purchase, scope of work, and projected costs to the lender. Typically you’ll need the purchase agreement, contractor estimates, and your project budget.

3. The lender assesses the deal: The lender will evaluate the property, purchase price, rehab costs, and exit strategy to determine approved loan amount and terms.

4. Underwriting and approval: After underwriting, the lender provides a term sheet detailing the loan terms. This is typically within several days.

5. Closing and funding: Once approved, you’ll complete the closing process quickly, often within a week or two. At closing, you’ll receive the loan capital to purchase and start renovations.

6. Draws during rehab: As phases of the project are completed, you can draw against the loan to pay contractors. Draws allow the lender to inspect progress.

7. Sale or refinance: After rehab is complete, sell the property for a profit or refinance into longer-term financing depending on your business model. Then repay the loan.

It’s a streamlined process allowing investors to act fast when opportunities arise.

What are the Typical Terms and Costs?

Hard money rehab loans come with specific terms and costs investors should understand. Here are some of the common terms you can expect:

• Amount: Can fund between 50-85% of purchase plus rehab costs; minimum $100k up to several million

• Term: 6 months – 3 years

• Rates: 8 – 15% interest rate depending on lender risk tolerance, project, and lending market

• Points: 2-5 points origination fee based on the loan amount

• Payments: Interest-only during rehab, then principal + interest payments later

• Prepayment penalty: None in most cases

• Collateral: The property and project act as collateral

• Lien position: Lenders want 1st lien position on the property

In addition to interest and origination fees, common costs include:

• Appraisal fees
• Inspection fees
• Lender’s title insurance policy
• Legal fees
• Filing fees

Be sure to factor these into your project costs. The fees allow for quick processing and underwriting.

What Do Lenders Look For To Qualify You?

Hard money lenders have an entirely different qualifying process than conventional lenders. They focus on the deal rather than your finances. Here are the key criteria they evaluate:

Loan-to-Value (LTV) Ratio – The percentage of the purchase price plus rehab costs they will fund, typically up to 85%.

After Repair Value (ARV) – The projected market value of the property after renovations. This factors into the LTV ratios.

Experience – Your track record flipping properties or managing rehabs successfully.

Exit Strategy – A viable plan for selling or refinancing the property after completing renovations.

Property Type – Most lenders prefer single family, small multi-family, retail, or commercial properties.

Provided the deal makes sense, fits their lending criteria, and exits cleanly, lenders will work with a range of credit profiles. The property and project are most important.

Where To Find Hard Money Rehab Loans

Now that you understand the pros and cons of hard money rehab loans, where do you find them? Here are some options:

• Mortgage brokers: An experienced broker who specializes in alternative lending can offer multiple loan options. They have established lender relationships.

• Direct lenders: Contact private lending companies directly. They lend their own capital rather than sourcing outside investors. Can be quicker.

• Real estate investor networks: Connecting with other investors, clubs, or listings can lead you to private lenders they have experience with.

• Online marketplaces: Sites like LendingHome, Lenda, and LoanDepot provide listings to compare loan offers.

• Referrals: Asking other real estate investors who they use can put you in touch with lenders they trust.

Vet any lenders thoroughly and compare options to find the best fit based on rates, terms, costs, requirements, and customer service.

Tips for Obtaining a Hard Money Rehab Loan

If you want to secure hard money financing, follow these tips:

• Have a solid business plan and exit strategy – Present a clear plan for renovations and selling or refinancing. Know your market.

• Provide detailed cost estimates – Accurate contractor quotes help lenders assess the deal and set terms.

• Know your ARVs – Conduct comps to determine realistic after repair values the lender will use.

• Bring equity to the table – Put at least 15-20% down in most cases to demonstrate commitment.

• Highlight experience – Sell yourself and your experience managing projects successfully.

• Build a relationship – Working with a lender on multiple deals helps secure future funding.

With the right preparation and information, you can obtain the hard money loan amount and terms you need to execute deals efficiently.

Pros and Cons of Hard Money Rehab Loans

Hard money rehab loans provide excellent benefits but also come with some drawbacks to weigh:

Pros

• Fast closings, often within days
• Approval based on asset rather than personal finances
• Can access larger loan amounts
• No prepayment penalties
• Interest-only payments during renovation
• Flexible draw schedules

Cons

• Higher interest rates and fees than conventional loans
• Shorter repayment terms
• Possible compounding interest
• Require lump sum payment at end of term
• Strict guidelines on use of funds

As with any financing decision, you have to assess the tradeoffs to make the best choice for your business objectives and financial situation. Hard money serves a specific purpose at the right time but may not always be the most cost-efficient long-term option.

Hard Money vs Traditional Loans

How do hard money rehab loans compare specifically to conventional bank financing? Here are some of the key differences:

Hard money provides more flexibility, faster turnaround, and easier qualifications at the expense of higher rates and shorter terms. Conventional loans offer better long-term affordability if you can qualify.

Wrapping Up

Just be sure to run the numbers carefully and understand the costs. Hard money serves a purpose, but you want to sell or refinance into more affordable financing once renovations are complete. With the right deal and preparation, a hard money rehab loan can propel your real estate investing business and success.