Investing in real estate is an excellent way for people to improve their financial position. However, one of the most common obstacles for investors is securing financing to make a purchase. Hard money loans are a common approach for people who do not have a strong credit history. These loans generally have a much higher rate of interest than typical loans. However, it is much more convenient for investors to receive this capital than going through a bank.
Real Estate Overview in Denver
Denver has one of the hottest real estate markets in the United States. Over the past decade, real estate prices in Denver have increased quickly. The city has a ton of investment opportunities for people who are willing to work hard and take financial risks.
The local banking industry is not conducive to real estate investors. Most banks require a substantial down payment before lending money for an investment loan. One of the most common uses for a hard money loan is to make a down payment on a home. The vast majority of real estate investors use loans to purchase investment properties. Before buying a property, real estate investors should research the local area carefully. Some investors wrongly believe that making money with real estate is easy. However, there are multiple examples of investors going bankrupt in Denver due to bad business deals.
Choosing a Lender
Before utilizing financing, a person should analyze all of their lending options. Some people wrongly believe that all lenders are the same. However, there is a drastic difference in customer service between banks. When working with a hard money lender, it is preferable to work with someone who has a track record in the industry. Some people become hard money lenders as a way to make additional income, and many of these lenders do not care about customers. People without experience in the lending industry may have unrealistic expectations about the payback period on a loan.
Hard money loans should be paid back quickly. Purchasing a home with a hard money loan is rare. Instead, most people use these financial instruments to make a down payment or to make a repair on a property. A shorter loan duration generally correlates with less risk for the lender. In most cases, investors should pay down the hard money loan as fast as possible to reduce interest expenses.
For years after the last recession, interest rates were at historic lows. Although interest rates have slightly increased since that time, rates are still much lower than the historical average. As a result, it still makes sense to use traditional financing methods to invest in real estate. An investor with average credit can receive an investment loan with an interest rate of five or six percent.
Hard money loans have much higher rates of interest. It is not uncommon to see hard money loans with a 12 percent interest rate. There are various reasons for the higher interest rates. In most cases, these loans are not from certified financial institutions. The lenders are taking on a lot of financial risk by lending the money.
Although real estate investing can be profitable, investors should conduct careful research before making any decisions. The Denver real estate market is competitive, and some people may overpay for a property. It is much better for an investor to wait for the right property than to quickly purchase the first property available. Investors should also have a property management team ready to help with the tenant placement and management process. Hard money loans are an excellent way to get started with this process.