Why Investors Need Loans for Investment Properties
Real estate investors use both debt and equity to finance their transactions, but loans for investment properties are quite commonly used. There are many reasons why real estate investors seek out debt financing for their properties. Here I will only discuss 3 reasons real estate investors seek out debt financing over equity financing. One very popular type of loan for investment properties is called a hard money loan. A hard money loan is any non-bank loan against a ‘hard’ asset such as real estate. This type of loan has less requirements as compared with a bank loan, but also comes with a higher interest rate. Despite the higher interest rates associated with these loans, here are 3 reasons real estate investors leverage this kind of debt:
Quick Loan Fundings: As compared with bank loans, loans for investment properties, such as hard money loans, fund very quickly. For example, a typical hard money loan can close and fund in between 5 to 14 days. In contrast, a bank loan can close and fund in an average of 21 to 45 days. For a real estate investor who must move quickly to take advantage of a good price on a purchase, the quick loan fundings of hard money loans are crucial for success.
Lower Qualification Requirements: Bank lending standards still haven’t relaxed much since the onset of the Great Recession in 2008. For example, in order to qualify for a commercial bank loan, an investment property cannot be vacant, except in rare cases. Because hard money lenders are willing to make loans against properties with low or no occupancy, it allows real estate investors to buy undervalued assets and stabilize them. They can later refinance these short-term loans on their investment properties with permanent bank financing.
Opportunity Cost: During 2009 to 2010, when so many assets were available at low prices, real estate investors leveraged debt in order to make their cash go further. To have all of their available cash tied up in just one asset would have been unthinkable. Investment property loans allowed these investors to make their cash go much further, and thus, they were able to pick up a larger number of distressed assets during the years between 2009 to 2010.
These are just 3 reasons why investment property loans are so necessary to real estate investors. Real estate investors with large portfolios of 5 or more properties, can use these loans to leverage their portfolios. What else would you add to this discussion? Have you had an experience where a hard money loan was crucial to your success in some way? Please share.
For more information about the different types of investment property loans offered by Private Money Utah, visit our loan programs page here, or please send us a message via our contact form and we will be in touch with you soon.