Investing in commercial real estate offers the potential for excellent returns, but it is often a rapid process that requires a significant amount of purchasing capital. These characteristics are not always compatible with traditional commercial real estate loans that need a cash down payment and can take months to finalize.
Another loan option that can make it possible to complete moves flexibly and make the investments that will be most beneficial to you is a hard money loan. When you need enough cash to make an investment with a quick turnaround time, a hard money loan is a non-traditional route that provides funding in exchange for collateral.
Pros and Cons of Hard Money Loans for Commercial Real Estate Investors
A hard money loan is an asset based loan in which the lender will offer money to finance a purchase using the real estate property as collateral. Depending on the lender, the loan could be good for up to 75% of the property’s value or potentially more.
These loans are financed by non-bank, private lenders with timelines that can vary between a few months and 5 years, although many of them are for shorter terms.
Instead of taking a month or more as other commercial loan options typically will, a hard money loan can often be finalized in as little as a few days, which is a major benefit in real estate. It also makes it possible to secure funding when your cash flow is too limited for a down payment.
A hard money loan can make it possible to find financing with the terms you need, but there are still a few drawbacks when compared to traditional loans. The various pros and cons of hard money loans for commercial real estate investing include:
- Easier Access – If you can offer the collateral, a hard money loan is often much easier to get since you do not need to go through the lengthy process of examining credit scores, cash flow, and financial history with a lender. This is both easier on the borrower and is part of the reason why the loans take only a matter of weeks to secure.
- Alternative Requirements – Hard money loans may be open to commercial real estate borrowers who do not meet the standard loan requirements. This could be a valuable part of your investment strategy.
- More Flexibility – Because you are not going through a bank, a lender can have more flexibility in choosing loan terms that may work better for you.
- Harder to Find – Fewer lenders provide hard money loans than traditional down payment loans for commercial real estate, so you may have to do more searching.
- More Expensive – A hard money loan will almost always have a much higher interest rate than a conventional loan as a trade off for convenience.
- Typically Shorter Repayment Times – in general, but not always, hard money loans are more of a short term solution rather than a long term investment option and you will need to have the cash flow to repay them over a shorter period.
It is important to be sure that any loan you are choosing is the right option when you invest in commercial real estate whether you go with a more traditional loan or choose a hard money loan for bridge financing. Working with an experienced loan officer can help you select the best loan to meet your needs, and also help you navigate the application, approval, and lending process for whatever type of loan you choose.
Mike Landrum at Landrum Loans works with a number of commercial real estate investment clients and is able to offer all of the tools you need to get started or grow your commercial real estate investment portfolio. Contact us to start the process with our team at Landrum Loans.