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

Hard money equity loans are a great financing option for real estate investors looking to fund fix-and-flip projects or other types of real estate investments In this comprehensive guide, we’ll explain everything you need to know about hard money equity loans, including how they work, their pros and cons, and how to find the best lenders.

What is a Hard Money Equity Loan?

A hard money equity loan is a short-term loan secured by real estate that is provided by private lenders, not banks or other traditional lenders. These loans are asset-based, meaning they are underwritten based on the value of the property rather than the borrower’s creditworthiness.

With a hard money equity loan, the property itself serves as collateral for the loan So if the borrower defaults, the hard money lender can foreclose on the property to recoup their investment

Hard money lenders will typically loan up to 65-75% of the property’s appraised value. This loan-to-value ratio provides a cushion for the lender in case they need to foreclose and sell the property.

The interest rates and fees on hard money loans are higher than conventional mortgages, but they can be obtained much faster for investors who need quick financing. These loans are designed to bridge short-term financing needs, usually 6-18 months.

How Do Hard Money Equity Loans Work?

Here is a step-by-step overview of the hard money equity loan process:

1. Find a property to fund: The first step is identifying an investment property to purchase and renovate. This is often a distressed property purchased at a discount.

2. Apply for financing: Once you’ve identified a property, apply with a hard money lender by submitting information about the property, proposed renovations, and your exit strategy.

3. Get an appraisal: The lender will order an appraisal to determine the after-repaired value of the property. This establishes the loan-to-value ratio.

4. Lender underwrites the loan: The hard money lender analyzes the deal to ensure the numbers pencil out and sufficient equity exists to secure the loan.

5. Close on financing: After the lender approves the loan, close on the financing and receive the funds to purchase and renovate the property.

6. Complete renovations: Use the loan proceeds to renovate the property within the proposed timeline.

7. Repay the loan: Once renovations are complete, sell or refinance the property to repay the hard money loan.

This process allows real estate investors to take advantage of distressed property deals by securing short-term financing based on the future value of the renovated asset.

Pros and Cons of Hard Money Equity Loans

Hard money equity loans offer several benefits but also come with some downsides to consider:

Pros

• Fast financing: Hard money loans can fund in as little as 5-10 days, which is much faster than traditional mortgages.

• Easy to qualify: Hard money lenders focus on the property’s value rather than the borrower’s credit, making qualification easier.

• Renovation funding: Hard money loans provide funds to renovate properties, allowing investors to add value.

• No prepayment penalties: Hard money loans can be repaid early without penalties once renovations are done.

Cons

• High interest rates: Hard money loans typically have interest rates from 10% to 15%, higher than conventional loans.

• Large loan fees: Lenders may charge 3-10 origination points to obtain financing.

• Short terms: Hard money loans usually have 6-18 month terms before needing to be refinanced or paid off.

• Strict lending criteria: While credit is less important, hard money lenders have strict criteria for asset collateral.

As with any financing decision, it’s important to run the numbers to ensure the juice is worth the squeeze. The speed and flexibility of hard money loans make them worthwhile for many real estate investors.

Tips for Getting Approved for a Hard Money Equity Loan

Getting approved for hard money loans is easier than qualifying for conventional financing, but there are some best practices investors should follow:

• Have some skin in the game – Hard money lenders like to see you invest some cash in the deal, usually 5-10% of the purchase price. This demonstrates commitment.

• Know your numbers – Analyze deals thoroughly and have detailed renovation estimates and realistic exit strategies. Lenders will review this closely.

• Focus on high-value areas – Properties in desirable markets will appraise better, allowing for maximum loan-to-value ratios.

• Highlight experience – If you have a track record of successful flips or renovations, put this front and center in your application.

• Build relationships – Getting repeat loans with a lender you have rapport with is easier than pitching new ones each time.

Following these tips, along with having a solid business plan, will go a long way towards getting your hard money equity loan approved.

Where to Find the Best Hard Money Equity Loan Lenders

The hard money lending space has grown rapidly in recent years. Here are some top sources to find reputable hard money lenders:

• Direct lenders – Many companies like Lima One Capital, Citivest and Brokermint specialize in hard money lending.

• Mortgage brokers – An experienced broker can shop your deal to hard money lenders in their network.

• Real estate forums – Investor forums like BiggerPockets have reviews of hard money lenders in specific markets.

• Referrals – Speaking with other real estate investors about lenders they’ve worked with can provide leads.

• Online marketplaces – Sites like LendingHome and Lenda allow you to compare multiple hard money lenders.

The most important factors when choosing a hard money lender are their reputation, lending criteria, interest rates, origination fees, and geographic presence. Take the time to vet a few potential lenders before applying.

Tips for Getting the Best Hard Money Equity Loan Terms

While hard money loans are easier to obtain, investors should still shop around for the best terms and rates. Here are some tips:

• Compare multiple lenders – Interest rates and fees can vary significantly between hard money lenders.

• Leverage repeat business – Your second or third loan with the same lender is often cheaper.

• Ask about discounts – Some lenders offer discounts for lower LTV ratios or reduced origination fees.

• Avoid prepayment penalties – Make sure you can pay off the loan early without penalty once renovations are complete.

• Check alternate structures – Lines of credit may offer more flexibility than standard hard money loans.

• Negotiate where possible – Don’t be afraid to make a case for improved terms if you have a strong deal.

Taking the time to shop hard money loans and negotiate the best terms can save thousands in fees and interest payments over the life of the loan.

Bottom Line

Hard money equity loans provide real estate investors and flippers with an efficient way to fund projects by tapping into an asset-based lending source outside the conventional mortgage market.

These loans make it possible to purchase and renovate properties much faster, allowing investors to capitalize on deals and add value through improvements. While costlier than traditional lending, hard money equity loans fill an important niche that fuels fix-and-flips and other types of real estate deals.

By following the tips above, real estate investors can effectively source and secure the right hard money equity loan to fund their next projects. The increased speed and flexibility outweighs the higher rates and fees in many cases, making hard money an important tool for active investors.