Securing the funds to move forward with a commercial property purchase can be the biggest hurdle in real estate investing. This is especially true if a borrower is new to the market and has less than stellar credit. Commercial hard money loans offer an opportunity for borrowers that might otherwise not be able to secure a loan.
The first thing to understand about a non-traditional loan is the funding source. When a borrower is granted money from a hard money lender, they are not receiving the funds from a bank. The funds come directly from a private lender or from a private lending group. While commercial hard money loans do fall under certain regulatory agencies, they are not regulated in the same way as banks. This is what allows them to be able to be quicker in the processes, but also at a higher rate.
The terms of a commercial hard money loan are also typically very short. Again, this is very different than a traditional loan, where the terms could end up being as long as 20 -25 years. For most hard money loans, a year is a typical period of repayment, although some can last up to 5 years. The point of these loans, though, is a quick turnaround for the investor and a fast influx of cash for the borrower. Repayment of the loan is negotiable, with one option being to only make payments on the interest during the term of the loan, followed by a balloon payment at the end of the term.
The top concern for a lender of commercial hard money loans is the value of the property in question. This is how the lender determines the size of the loan that they are willing to grant. It is important to note, that if the borrower has multiple properties, they can use the value of one of their other properties to secure the loan, but this also puts that property at risk in case of default. So while a borrower might be able to receive a higher loan amount by doing this, it comes with a great deal of risk.
Because of the focus on the value of the property and the security it provides in case of default by the borrower, hard money lenders are not as concerned about the credit of the borrower. They know that if something were to happen and the borrower were to default that the loan will be repaid out of the foreclosure of the property. The loan is based on equity rather than credit, which is why many borrowers who are unable to obtain a traditional commercial loan often turn to hard money as an option.
Commercial Hard Money Loans sound risky. Is there anything I can do to minimize that risk?
The best thing that you can do as a borrower is to not get in over your head. Hard money is not risky if you have a plan and know how you are going to pay it back. While many borrowers have abused hard money, there are also plenty of examples of borrowers who have used the quick influx of cash to completely turn their businesses around.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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