Now that the housing market crash is far behind us, economic growth has spurred the real estate industry into action attracting a new wave of investors. According to the National Apartment Association, the number of Americans who are renting out their properties is higher than it’s ever been.
While investing in a property is one of the smartest ways to generate an income or double up on capital, borrowers need to be aware of the different kinds of financing options. To help you make the right decision this article presents a newbie’s guide to investment property loans.
Understanding Investment Property Loans
Investment property loans are named as such because the property itself acts as the collateral. Commercial hard money lenders or banks finance the amount required for the purchase or rehabilitation of a property or both. The only difference between both institutions is that banks lend money on the bases of the current market value whereas hard money lenders base it on 60-80% the estimated ARV or after-repair value.
A normal transaction starts with the investor request a loan from the lender to purchase a house, commercial building, multifamily dwelling, or a condominium unit that needs repair. The lender evaluates the property’s value as well as the amount required for the fix-up and ARV. Based on its findings, the lenders determine the loan amount, payback period, and interest rates.
Some lenders break down the loan into tranches, one for the rehab and another for the property itself. The borrower and lender then proceed to contractually set the property as collateral ranging the lender the right to seize the property should the borrower default.
Hard Money Loans vs. Conventional Loans
Investment property loans have very different terms and conditions based on who the lender is. Banks give considerable weight to the borrower’s credit and reject loan applications if it falls below a certain threshold. Hard-money lenders, on the other hand, focus more on the property’s value and might approve of loans as long as the deal makes sense.
Also, banks are known to have long approval processes that can even last for a month. Hard-money loans are generally approved and processed within a couple of days.
The benefit of availing investment property loans from hard-money lenders is that it allows you to capitalize on real estate opportunities without letting them pass into the hands of competitors. GCP funds offer a range of hard money loans in Indianapolis, Fort Wayne and Evansville, IN that maximize your chances of financial success!
Get in touch with them today for more information.