Want to know why and when you should take out a hard money loan?
Why should you take out a hard money loan for your commercial real estate investment? If you are not sure about hard money loans being a good idea or not, check out the article below. It clears a lot of gray area.
Private, often called “hard money”, commercial mortgage loans typically carry interest rates of between 9.99% – 14% and charge origination points of 2% – 5%. Rates and terms like these mean that hard money can easily have an APR of over 17%. And, as a professional in commercial real estate finance, I can assure you APRs in that range are not at all uncommon.
So the question becomes, at those kinds of rates, when does hard money ever make sense? The surprising answer is that, when the situation calls for it, hard money makes a-lot of sense.
Private commercial mortgage loans are an indispensable part of the real estate lending industry today and, in fact, represent the fastest growing segment in commercial lending. This is because hard money lenders can do what conventional lenders can’t. They can move with incredible speed, they can close with a minimal amount of documentation and they can lend based on their instincts rather than strict corporate policy.
Federally and State chartered banks, Wall Street investment houses and insurance companies are all highly regulated. Banks because they are federally insured, Wall Street because they create securities that are sold to the public and insurance companies because our very economy depends on their ability to pay claims. Their lending criteria is set in stone and monitored by all types of State and Federal regulators. Banks can’t be fast or flexible it’s literally against the law. Further they can’t disregard one factor, such as borrower credit, in favor of another, such as a high level of equity. Every I must have a dot and every T must be crossed. It can take as-long-as 180 days, from start to finish, close an institutionally funded, conventional loan. Three months is typical.
On the plus side, conventional loans offer highly competitive interest rates and favorable terms. Rates are based on a benchmark, such as the 30 day LIBOR, plus a small margin. Points rarely exceed 2% of the gross loan amount. Banks and big finance companies serve an important purpose, they are the money centers at the heart of our economy, but they also have their limitations. Try as they may they can’t be nimble.
Private lending on commercial property, on-the-other-hand, is largely unregulated. Of course hard money lenders must abide by all anti-fraud and standard business laws, but the Government does not dictate or monitor their lending policies or set their risk parameters. Private lenders have the freedom to be flexible if they choose to be.
When shopping for a loan, a business person’s natural inclination is to seek the lowest rates and best terms available but there are situations when the cost of money is a secondary consideration.
Hard money makes sense when time is of the essence and your deal depends on fast dependable financing.
About the Author
Glenn Fydenkevez, President of MasterPlan can be reached at: glenn.fydenkevez@masterplancapital.com
Glenn Fydenkevez of MasterPlan Capital LLC
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