What to Know About Hard Money Rates for Investment Property

Learn what affects hard money rates for investment properties and how to secure the best financing options for your real estate goals.

If you are a real estate investor, then you understand the importance of having access to quick and reliable funding when you come across a great opportunity. Whether we are talking about flipping homes, investing in rental properties, or any other strategy that you may use to your advantage here, there is no denying the fact that you absolutely need to move quickly. And, traditional mortgages are anything but quick, which is why hard money loans often come up as an interesting option that you can use to your advantage here.

Here are some ways to get started with investing in real estate in general: https://www.britannica.com/money/real-estate-investing 

You have heard that hard money loans come with interest rates that are higher than those you can get on a traditional mortgage. That may have discouraged you a bit without you even understanding clearly what to expect from the rates, why they may be higher, and what affects them in the first place. And, that has to change.

To put it differently, you need to get a better understanding about all of this before making any kinds of concrete decisions on whether you want to get this type of a loan or not. So, that is what we are going to help you out with today. In few words, we will help you understand the rates better, so that you can know what to expect should you decide to go for this solution when investing in real estate.

Understanding Hard Money Loans

Before we get to the actual rate, though, let us first make sure that you understand what hard money loans are in the first place. And, to explain things simply, we are talking about short-term loans that investors use when they need to get financed quickly. The approval process is fast because the loan is backed by the property that is being bought, instead of the credit score of the investor. Click this to learn some more about how to actually invest in properties at all.

What to Expect From the Rates?

Clearly, given that the period of approval is so quick, and that qualifying is easy, as well as the fact that we are talking about short term loans, it is completely normal for the interest rates to be higher than those associated with the traditional mortgage option. What is it, though, that you should specifically expect from the rates? That is, what can you expect if you decide to go for a hard money loan?

Usually, you can expect the rates to be anywhere between 8% and 15%, with various factors affecting them. As you can see, thus, those definitely tend to be higher than the rates on traditional mortgages. But, as we have mentioned above already, that is completely normal, and to be expected, given that this particular lending solution carries greater risks for the lenders, while offers greater flexibility for the borrower. So, it is no wonder that the costs are higher.

Factors That Affect the Rates

Now, above I have mentioned that those rates typically range from 8% to 15%. But, that is quite a big range right there, and you want to know what it is that you can expect when you decide to apply. To understand that, you will have to, naturally, understand what it is that affects the actual rate. So, that is what we are going to be discussing right now.

• Property Type and Condition

I have already explained that these types of loans are actually asset-backed, meaning that they are secured by the property you are buying. It is no wonder, therefore, that the hard money rates will depend on the actual type, as well as the condition, of the property you are purchasing. The lender assesses the risk in order to provide you with a rate, and the type and condition of the property will surely affect the amount of risk they are assuming. For instance, multi-unit and commercial properties are generally considered to be riskier than, say, some single-family homes in certain stable neighborhoods. Similarly to that, those properties that need minor repairs are less risky than those needing complete renovations, and, as you may have guessed it, with lower risks come lower interest rates.

• Borrower Experience

What you may not have known is that the experience of the borrower will also affect these rates. So, seasoned investors that have a lot of projects behind them and a successful track record can often secure better rates than beginner investors. I suppose you can understand why this is – after all, seasoned investors present less risks. But, beginners can build credibility over time and thus watch their interest rates being lowered in the future.

• Market Conditions

The market conditions are sure to invest any kinds of interest rates out there, including, of course, hard money rate. Factors such as market demand and economic trends are sure to have an impact on these. Generally, when traditional rates increase, hard money ones are bound to follow as well. So, you should be aware of the market trends during the period in which you want to invest, so as to understand what may affect the overall costs.

• Loan-to-Value Ratio

The loan to value ratio, also known as LTV (understand the ration better with the help of this article) basically measures how much of the property’s value the lender is actually financing. What does this specifically mean, then? In short, it means that the more equity you bring to the deal, the lower the LTV, and the lower the LTV, the better your hard money rate.

• The Actual Lender

Of course, we cannot fail to mention that the actual lender has a huge impact on the interest rates you can get. Meaning that you can get different offers from different ones, because each of them calculate their own risks, and they can, thus, wind up offering either a lower or a higher rate. Your task, therefore, is to find legitimate and reliable lenders, as well as to get more offers from them, and then compare them, in an effort to get the best deal.

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