The ability to leverage investment activities is a top benefit associated with real estate investing in comparison to some of the other investment vehicles that you could use. Leveraging essentially means that you are using borrowed funds to pay for a portion of the up-front cost of the investment. While you are not paying for 100 percent of the cost of the investment out of your own funds, your return on the investment will be based on the full value of the investment.
As you can see, using leverage strategically when buying real estate is essential for maximum profitability. However, the amount of leverage available to you varies from lender to lender and from project to project. Some real estate investment opportunities qualify for traditional financing with a higher loan-to-value. However, if you need to use a hard money loan for your project, you can expect a lower LTV. With a closer look at this aspect of hard money loans, you can better determine what LTV that you can reasonably expect when you seek financing from a hard money lender.
Understand How Hard Money Loans Work
Traditional residential and commercial real estate loans have very specific requirements and guidelines, and this ensures that only the least risky loan requests are approved for financing. Because these lenders only approve loan requests that the deem to be the least risky, they are able to offer a lower interest rate and a higher loan-to-value.
On the other hand, hard money loans are provided by private lenders and investors who are willing to look at the merits of the project in a more individualized way. There is not a specific set of predetermined guidelines that a project must meet in order to qualify. Because of this, these loans may be riskier for investors and private lenders to make. The interest rate and the loan-to-value will reflect this. Essentially, hard money loans can be used to leverage investments that traditional lenders will not look at because of the increased perceived risk, and borrowers should expect to make a larger down payment and to receive a higher interest rate as a result. Because each loan request is unique, the pricing offered by hard money lenders will vary from project to project.
While a lower loan-to-value is to be expected with a hard money loan, be aware that there are not hard and fast rules regarding hard money leverage. Each hard money lender has unique loan terms and parameters, and this means that the best way to determine how much leverage you can obtain for your new investment opportunity is to compare options. Many reputable hard money lenders will advertise their highest loan-to-value offered for specific property types or types of projects, and you can often find this on a lender’s website. This makes it easy to narrow down your list of lenders to contact, but you still need to request a customized quote to get accurate information.
Submit a Loan Request
Requesting a firm quote from a hard money lender is not the same as requesting a quote from a traditional lender. With a traditional lender, a standard quote is issued based on the expectation that the loan request will fall within predetermined parameters. With a hard money lender, a personalized quote is issued based on the specific attributes of the loan request. This means that you will need to submit a detailed loan request to each lender to obtain a firm quote. A smart idea is to create a loan package that outlines all pertinent information. You can easily submit a copy of the same package to each of the lenders that you want to obtain a quote from.
This loan package will outline the strengths and weaknesses of the applicants. It will also outline details about the property. This includes construction, development or rehabilitation costs. It also includes a takeout strategy involving a new permanent loan or a timeline to sell the property to an interested buyer after the work has been completed. Depending on how substantial the information is that you provide up-front, you may receive a conditional letter of intent or a firm quote. When comparing offers from different hard money lenders, pay attention to any conditions outlined in the quote that you receive. This will help you to determine which offer is most ideal for you.
Leverage is an essential component of any loan request. It will affect your down payment as well as available cash reserves after the loan closes. Your loan amount will also impact your monthly loan payments, equity appreciation and numerous other factors. When you compare the leverage offered by different hard money lenders, analyze the options based on how they affect your immediate financial situation as well as the overall profitability of the investment in the long run.