If you think real estate is the best long-term investment, you’re not alone; so do 34% of surveyed Americans. To these folks, it’s better than gold, stocks, bonds, or savings accounts.
Investing in real estate requires considerable capital, though. Even more so this 2023, with home prices projected to increase by over 5%.
Fortunately, you can get hard money loans to help you buy a commercial or investment property. These financing programs are also often easier to qualify for than traditional mortgages.
The biggest downside is that you can expect hard money lender rates to be much higher.
Still, there are steps you can take to qualify for lower hard money loan rates. We’ve outlined them in this guide, so keep reading.
Table of Contents
Finance the Right Property
Traditional lenders base their loan rates on applicants’ credit scores and finances. Commercial hard money lenders may do too, but their main focus is the value of the collateral.
In hard money lending, the collateral is the real estate property you want to finance. In case of loan default, it serves as the payment backup; lenders can seize it and sell it to recover their loss. So, it must offer enough value since lenders may have to use it to recoup the money they lend.
For many hard lenders, a property’s value depends on how sound it is as an investment. Thus, what you plan to do with it (e.g., renovate, rent, or flip it) affects its value in the eyes of lenders. They want to ensure you can profit from it enough to pay your loan back.
The more profitable the property seems, the less risky you, the borrower, may appear to lenders. The lower your risk as a borrower, the more likely a lender will offer you a lower loan rate.
So, be wise when choosing your investment, starting with thoroughly vetting its neighborhood. It should have a low crime rate, a strong job market, and quick access to amenities and good schools. Conversely, it shouldn’t be prone to natural disasters like floods and earthquakes.
When financing a rental property, consider its area’s average rental and vacancy rates. The average rent should be close to what you plan to charge to cover your loan payments, taxes, and other costs. It should also have a low vacancy rate, as a high one suggests people don’t like to rent in that area.
Save for a Bigger Down Payment
Hard money lender rates, often expressed as annual percentage rates (APR), can range from 8% to 15%. So if you must borrow $500,000, your yearly payments for interest alone can be between $40,000 to $75,000.
Lenders may put you in the lower tier if you make more than the minimum down payment required. It depends on the company, but the typical requirement is 20% to 30% of the property’s purchase price.
The bigger your down payment, the less money you must borrow, and the less lenders could lose if you default. It also shows your earnestness in investing in a property. Since you’re taking on a more sizeable share of the purchase price, you’re also taking on more risk.
All that can help make you look like a low-risk borrower to lenders. As a result, they’re more likely to offer you better loan rates.
Aside from lowering your rates, putting more down reduces your total interest payments. After all, lenders will apply the APR to a smaller loan amount. The less you pay in interest, the more money goes into your pockets.
So before applying for a hard money loan, save for a down payment higher than what lenders require. For instance, if the minimum required is 25%, be ready to commit to paying 30% or more.
Gain More Experience
New house flippers and investors are a liability for lenders due to their lack of experience. It can lead to them purchasing a property that isn’t worth the time and money to flip or renovate.
An example is when a new flipper buys a house with an after-repair value (ARV) of over 70%. This can happen if they fail to realize the property has major structural issues.
Such a failure often results from not having a trained eye. To lenders, it’s a risk they may not want to take or, even if they do, justifies a much higher interest rate.
So as a newbie real estate investor, consider gaining more experience before you apply for a loan. You can work with a veteran local flipper or investor on two or more projects. Put your earnings aside so you can use them as your down payment once you’re ready to apply for financing.
Consider a Longer Loan Term
Hard money loans have terms ranging from six months to 3 years. The shorter the duration you choose, the higher the interest rate usually is.
The chief reason is that, with a shorter loan term, lenders have fewer months to charge their APRs on. So if they don’t set higher rates, they’d make less profit.
Suppose you borrow $500,000 with a 12% yearly rate. Let’s also say you choose a 12-month term, so your monthly interest payment will be $5,000 for 12 months for a total of $60,000.
If hard money lenders charge the same rate for a 6-month loan term, they’ll lose a potential profit of $30,000. Avoiding or minimizing such losses is why they often charge a higher APR for shorter loan terms.
However, remember that you’ll likely pay more in total interest fees if you choose a longer loan term. Still, this may be a better route if you’re unsure you can pay the loan in full within six months.
Enjoy Lower Hard Money Lender Rates
Real estate investments are popular because of the cash flow they can generate. You can make money through their appreciation, rental income, or sales profits.
However, you may not enjoy such benefits if you can only qualify for too-high hard money lender rates. So before applying for a hard money loan, use the strategies in this guide to help you nab a lower rate.
For more investment-related tips and tricks, check out our other recent blog posts now!
