When it comes to investing in real estate, finding the best way to finance your investment can be difficult. Most investors have two main options to choose from: hard money loans and mortgage loans. Both types of financing are good choices, but they work in different ways. Before you can make the best decision for your business, you need to understand how each loan option works.
Hard Money Loans
Hard money loans are short-term loans designed to help investors finance their real estate purchases quickly. Most hard money lenders for real estate investing companies and individuals process applications for financing in a matter of weeks, making it easier for investors to get money quickly. Most hard money lenders expect borrowers to repay the loans in full in just one or two years. If you don’t repay the loan, you risk losing the property you invest in.
That said since the property you’re buying acts as collateral for the loan, hard money lenders have flexible loan requirements. These lenders are more willing to work with borrowers with low credit scores, no down payments or are new to the real estate investment industry.
Mortgage loans are most commonly used to finance the purchase of residential properties. They have much longer terms than hard money loans, with some mortgages, giving you up to 30 years to repay the loan in full. Since the loan terms are typically much longer, these loans often have lower interest rates than hard money loans.
However, unlike hard money and bridge loan residential real estate providers, traditional mortgage lenders are often more selective. They want to work with borrowers that have high credit scores, low levels of existing debt, and a large down payment amount to help secure the loan.
Which One Is Best?
Choosing between hard money loans and traditional mortgage loans is truly a matter of personal preference. However, hard money loans are best for investors who plan to sell their property shortly after buying it. This includes fix-and-flip investors and businesses looking for a quick way to turn a profit. Since you’re selling the property shortly after taking out the loan, you won’t have to worry about high-interest rates costing you thousands of dollars. Since the loans require minimal to no down payment, you’ll have plenty of cash on hand to finance your improvements without having to resort to additional loans.
Conventional mortgages are ideal for real estate investors who plan to keep the building for at least a few years. Since the average repayment terms range from 10 to 30 years, the longer you can keep the property, the more equity you’ll build, and the more money you’ll be able to keep should you end up selling the property. Even better, you’ll save money on interest payments as long as you stay in the building. If you plan on selling the property shortly after making the investment, you won’t be able to take advantage of those low-interest rates.
Investing in real estate is a great way to make money and diversify your income. Just make sure you choose the right loan type to finance your purchase. Look at your goals, your plans for the investment, and your personal financial situation before making a decision.