If you’re looking to invest in rental properties, you may be wondering how to use hard money for rentals. Hard money loans are also known as private lending or bridge loans, and you will need them to invest in rental properties if you don’t have the necessary funds. Hard money loans are accessible for anyone, but they should be used with caution (and only as a short-term solution) because of their high fees and interest rates. Still, many investors love them for their speed and flexibility.
In this article, we’ll discuss how to use hard money for rentals, what hard money is, how it works with rental properties and whether or not you can use it for downpayments. We’ll also provide some tips on how to get the best rates on a hard money loan. So let’s get started!
What are Hard Money Loans?
Hard money is an alternative form of financing that has been around for decades. The idea behind hard money loans are simple, in order to get a loan you need something of value that can be used as collateral. Hard money loans work because the lender gets to keep your property if you don’t repay the loan. They have no recourse against you personally. Because of this, hard money loans often come with much higher interest rates and fees.
For a more detailed definition of a hard money loan, check out out post about Hard Money FAQs.
How Do Hard Money Loans Work with Rental Properties?
Now that you have an understand of what hard money loans are, let’s talk about how they actually fit in with rental properties. Hard money loans are often used in conjunction with rental properties to help investors speed up the purchase process so they can close much faster. Hard money is mostly used when purchasing an under-priced property, which you believe could be fixed up and rented out quickly for a profit.
Here’s an example of how hard money works with rentals:
- You discover an incredible deal that would be perfect for a rental property. But the seller wants $200,000 and you only have $40,000 saved up. You determine that the property also needs $50,000 in repairs.
- So you apply for a hard money loan (learn how to approach a hard money lender) and get approved for a loan amount of $250,000 with an interest rate of 1% per month and 3 points of origination.
- You buy the property and start renovations right away so you can move your new tenant in as soon as possible. You spend $50,000 in renovations and when the property is completed you believe you can rent it out for $1,500 per month.
- You complete your renovations in 3 months and get the property appraised for a traditional mortgage. It appraises for $312,000.
- Becuase the property just sold 3 months ago, the bank will only loan to you at 70% LTV. This would be a loan amount of $218,400 (for simplicity, we are leaving out loan costs but this is another expense you should definitely be accounting for as it will be several thousand dollars).
- You owe the hard money lender $250,000 + $7,500 (3 months interest at 1%/mo) + $7,500 (3% origination) = $265,000.
- You received $218,400 from the bank + $40,000 in savings = $258,400. You’ll still need to come up with the difference.
You can see in this example how fees, interest and other costs can add up very quickly, even on a good deal. It’s very important to put all of this in a spreadsheet and add in every possibility. You can easily put yourself in a difficult position if you aren’t able to refinance out orr pay off your hard money loan.
What Types of Hard Money Loans Can Be Used for Rentals?
While the term “hard money loan” is used very broadly, there are several different types of hard money loans. We’ll discuss a few in detail. Here are some common ones that can be used for rentals:
- Fix and flip loans / BRRRR Financing
- Rental loans
- Commercial loans
Fix and Flip Loans
The most common type of hard money loans to use for rentals are what we call Fix and Flip Loans. This is because you will typically purchase a property under market value and renovate it before renting it out. The entire loan term should be short enough so that you minimize interest payments while movinig iin a tenant quickly.
Most investors will use these loans to fix up their properties and then they refinance out with a traditional loan, as in our example above. This is known as the BRRRR method.
Rental Loans
Some hard money lenders will offer long term rental loans with similar rates to traditional financing. You can usually save money by simply rolling your rehab loan into a long term loan with the same lender if they offer it.
Commercial Loans for Rentals
Because hard money loans are very similar to bridge financing, you can also use them for large commercial properties. A lot of investors will take out a bridge loan and convert it to a commercial loan if they have enough time on their lease and the lending window is open.
However, many lenders will require that your property be rented out partially or completely. You will need to show that the property generates enough revenue to cover the expenses and mortgage.
Can You Use Hard Money for Downpayments?
Typically, no, you can’t use hard money for downpayments. This is because both the hard money lender and the lender you’re paying the downpayment to will both want to be in first position as a lien holder.
Key Takeaways – How to Use Hard Money for Rentals
Hard money loans can be a great way to get started in the real estate investment game. They come with many different types and costs that you need to consider before finalizing your decision. We’ve covered some of these, including hard money for rentals, fix-and-flip loans, rental loans and commercial loans for rentals. One important point is that if you are using hard money, be sure to consider ALL costs as they are not cheap loans typically. Using hard money for rentals is a great way to build a rental portfolio without tying up all of your funds.
This article discussed how to use hard money for rental properties, hopefully it answers all of your questions!