Long term hard money loans can be a great financing option for real estate investors looking to purchase or rehab an investment property. As someone who has used these types of loans in the past, I wanted to share my experiences and advice for securing long term hard money financing.
What are Long Term Hard Money Loans?
Hard money loans are a type of asset-based financing, meaning they are secured by the property itself rather than the borrower’s creditworthiness The loans are typically issued by private lenders or companies rather than banks or credit unions
Long term hard money loans have repayment terms longer than 1 year, often up to 5 years or more. This provides more flexibility for borrowers who need extra time to renovate and sell or rent out an investment property.
Benefits of Long Term Hard Money Loans
There are several key advantages that make long term hard money loans appealing:
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Higher Loan-to-Value (LTV) Ratios: Hard money lenders can offer loan-to-value ratios up to 90% or more of the property’s value. This allows investors to leverage their money further.
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Flexible Qualifying: Hard money lenders focus more on the property’s potential value rather than the borrower’s credit score or income. This opens up financing for those who may not qualify for bank loans.
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Speed These loans can fund much faster than traditional mortgages sometimes in as little as a few days. This enables investors to jump on deals quickly.
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Renovation Funding Many long term hard money loans will finance both the purchase and renovation costs to rehab an investment property
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Interest-Only Payments: For the first 6-12 months, borrowers often only pay the interest on the loan. This helps free up capital during the renovation period.
Drawbacks to Understand
While beneficial overall, long term hard money loans do come with some downsides to consider:
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Higher Interest Rates: Interest rates typically range from 7% to 15%, significantly higher than conventional mortgages.
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Upfront Fees: There are often 2-5% origination fees charged. Discount points may also apply.
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Shorter Amortization: These loans may have amortization periods as short as 5-7 years, meaning they don’t fully self-repay over the life of the loan.
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Prepayment Penalties: Borrowers can face penalties if trying to pay off the loan early. Make sure to ask lenders if they charge these fees.
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Difficulty Refinancing: Long term hard money loans can be difficult to refinance into conventional mortgages. Make sure you have an exit strategy.
How to Get Approved
If you’ve decided a long term hard money loan is right for your next real estate investment, here are some tips to get approved:
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Find the right lender: Look for established hard money lenders with competitive rates and fees. I recommend checking industry review sites.
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Get your documents in order: Lenders will want to see financial statements, renovation budgets, contractor bids, and details on the property purchase.
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Have a solid business plan: Show how you intend to renovate, rent out, and eventually sell or refinance the property for a profit.
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Leverage existing equity: Having equity in other real estate you own improves your chances of qualifying and getting better loan terms.
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Highlight experience: Emphasize any prior experience flipping houses or managing rental properties. This reassures lenders.
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Offer added collateral: Providing additional collateral like stocks/bonds, or getting a cosigner may help secure better financing.
Interest Rate and Fees to Expect
Interest rates on long term hard money loans typically range from 8% on the low end up to 14% or more for higher risk projects. The better the deal and your qualifications, the better rate you can likely obtain.
In addition to interest, you’ll pay several fees and costs such as:
- Origination fee: 2-5% of loan amount
- Application/processing fees: $500 – $1500
- Appraisal fee: $300 – $500
- Third-party report fees: $100 – $300
- Loan servicing fees: 0.25% – 2% annually
Aim to negotiate lower rates and eliminate any unnecessary junk fees where possible. Even shaving off 1% on your interest rate can save substantially over a 5 year loan.
Tips for Securing the Best Terms
Follow these tips to help secure the best possible loan terms when seeking long term hard money financing:
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Shop multiple lenders to compare interest rates and fees. Even a 0.5% difference in rates can save thousands.
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Opt for a shorter term like 2-3 years. This poses less risk to the lender so may qualify for better rates.
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Pay loan fees yourself rather than rolling them into the loan. This lowers the loan balance and interest costs.
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Buy down the interest rate by paying additional points upfront, like 1-2% of the loan amount. This can secure a lower ongoing rate.
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Offer a larger down payment, ideally 25% or more of the purchase costs. More equity equals better loan terms.
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Have a solid exit strategy to either sell or refinance into longer-term financing. Lenders want to know you can pay them back.
My Experience Using a Long Term Hard Money Loan
As an active real estate investor, I once used a 3-year long term hard money loan to purchase and renovate a small apartment building. Here were the key details of my experience:
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Loan Amount: $475,000
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Purchase Price: $400,000
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Renovation Budget: $125,000
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Loan Term: 36 months
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Interest Rate: 9%
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Origination Fee: 3% of loan amount
I was able to leverage the long term loan to buy the property and fully remodel the 6 units over a 12 month period. We then rented out the units at market rates, which provided positive monthly cash flow.
Near the end of the 3 year term, I was able to refinance into a conventional apartment loan at just 4.5% interest. The long term hard money loan enabled me to add substantial value to the property and build equity through forced appreciation.
Key Takeaways
Long term hard money loans can be extremely useful financing tools for real estate investors. Just make sure to shop competitively, calculate total costs, understand the risks, and have a sound repayment plan in place. With the right deal and preparation, these loans provide the leverage and flexibility needed to execute profitable investment strategies.
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Long-term 30-year mortgage solutions designed to help you finance a rental property, even if you can’t qualify for a conventional or conforming mortgage loan. Typically, an investor uses a hard money loan first to repair the property, and then refinance into a long-term loan.
Short-term hard money loans are used to purchase, rehab, and sell or refinance a property. These loans are ideal for financing distressed properties, that also need to close quickly.
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FAQ
What is the longest term for a hard money loan?
What is the average term of a hard money loan?
What are the terms for a hard money loan?
What credit score is needed for a hard money loan?
Are hard money loans good for investors with bad credit?
With a hard money loan, the lender or investor is typically more interested in the property than in the borrower’s credit score. That makes it a more flexible option for some investors with bad credit scores. Some lenders require a credit check, though, and some have minimum credit score requirements. Make sure you understand the lender’s policy.
Are hard money loans more expensive?
Hard money loans have much higher interest rates, typically around 8% – 15%. Hard money loans can also be more expensive depending on the lender’s preferred loan-to-value ratio (LTV). If a lender will only finance 70% – 80% (or less) of a property’s value, you’ll likely need to bring a sizable down payment to the closing table.
What is a hard money loan?
Though hard money loans work well for some borrowers, they’re also called “loans of last resort” for a reason—they tend to be risky. Hard money loans are short-term secured loans where the lender is typically an individual investor, group investor or company, unlike a traditional financial institution or mortgage lender.
How long do hard money loans last?
Hard money loan terms are usually short, typically lasting 1 – 3 years. This fast turnaround means lenders will profit quickly – either from interest on the loan or if you default on the loan. Let’s take a look at how higher interest rates come into play with hard money loans.