Hard money loans, also known as private money, are trusted by countless property entrepreneurs in California. Find out if it is a good fit for your property project, too.
If you’re a real estate entrepreneur in California, you might find that traditional financing options don’t always fit your needs.
Conventional mortgages are great for long-term residential properties, but they often fall short when it comes to short-term investment opportunities. This is where hard money loans come into play. But how do you know if a hard money loan is the right choice for your property project?
Here are some common scenarios that might make this type of financing a good fit.
Common Scenarios for Hard Money Loans
1. Purchasing a Property Under a Tight Closing Timeline
Example: “My competitors have discovered the same great deal I did. I need funding fast, so I can put in an all-cash offer and close quickly.”
Hard money loans can be approved and funded quickly, making them ideal for situations where time is of the essence.
2. Fix-and-Flip Projects
Example: “I found a fixer-upper that could make $56,000 in profit after I fix the floors, remodel the bathroom, and do some cosmetic repairs to the exterior.”
These loans are perfect for short-term projects where you plan to buy, renovate, and sell a property quickly.
3. Retrieving Properties from Foreclosure
Example: “I found a foreclosed property in an up-and-coming neighborhood, but I only have the capital to cover 40% of the purchase cost. I can’t miss out on this great deal!”
Hard money loans can provide the additional funds needed to secure a foreclosed property.
4. Renovating Rental Property to Raise Rental Rates
Example: “I estimated I can raise my rental rate by 12% and drop my repair expenses by 6% if I remodel the kitchen and bathrooms. I need to start and finish this remodel quickly so my next tenants can move in.”
Quick renovations funded by hard money loans can help increase rental income and property value.
5. Reconstructing a Property for Residential Use
Example: “I’ve noticed a new vocational school in this area is causing a great influx of out-of-town students. I need to finish my condo conversion before the start of the school year, so I can sell it as a rental property.”
These loans are useful for projects requiring fast turnaround to meet market demands.
6.Resolving a Short-Term Issue Affecting the Property
Example: “My rental property needs an emergency roof replacement. I need funding as quickly as possible because every day I’m waiting for a loan is a day I’m paying for a house without tenants.”
Emergency repairs can be quickly funded, minimizing income loss.
7. Borrowing with a New Entity with No Financial History
Example: “I recently became a full-time flipper and started an LLC to protect my other assets.”
Hard money lenders are often more willing to work with new entities compared to traditional banks.
8. Having a Recent Foreclosure or Bankruptcy on Record
Example: “Three years ago, I jumped into a construction project without any experience and the project went terribly wrong. I now have the knowledge I didn’t have back then, but I can’t seem to find a lender who’s willing to give me another chance.”
These loans can be an option for those with blemished financial histories.
9. Purchasing Unpermitted-Work, Uninhabitable, or Burn-Out Properties
Example: “I’m an experienced flipper who takes on the properties most other real estate entrepreneurs shy away from. I know how to get it done, I just need a lender who sees the value of a calculated risk as I do.”
Hard money loans can finance properties that traditional lenders avoid.
10. Leveraging Other Properties to Get Cash Out for the Next Project
Example: “I have two rental properties and one property I’m currently rehabbing. I completed the plans for a new townhouse, so I want to cash out to pay for the construction costs.”
These loans allow you to access equity in your existing properties for new investments.
11. Cross-Collateralizing to Purchase a New Property
Example: “I’ve owned three rental properties for nearly seven years and just stumbled on a fixer-upper that I can easily rehab and rent out. I don’t have the capital for the down payment, but I want to use the equity I have built up in my other properties.”
Using multiple properties as collateral can help secure funding for new deals.
12. Lacking Funds for the Rehab or Addition to a Purchased Property
Example: “I have all the permits to transform a large garage into an in-law suite, but I can’t pay for all the construction costs out of my own pocket.”
Hard money loans can cover renovation costs, enabling property improvements.
13. Funding the Construction of an ADU
Example: “I have calculated that building an Additional Dwelling Unit for my investment property would significantly increase my cash flow, but I can’t cover the full construction budget.”
These loans can fund the construction of additional units to boost income.
14. Low FICO Score
Example: “A medical emergency required me to use all my available credit and apply for more credit lines than I ever needed before. After my health recovered, I found a great construction project that would make the profit I need to pay off the medical bills. However, my low credit score disqualifies me for any conventional loan.”
Hard money lenders often overlook low credit scores if the investment is sound.
15. Foreign National (Non-Permanent Resident)
Example: “I’m a German who wants to invest in the U.S. real estate market, but it’s nearly impossible for me to get a loan and prove my financially secure status.”
These loans can be accessible to foreign investors who struggle with conventional financing.
16. Pulling Cash Back Out of an All-Cash Purchased Property
Example: “I paid all-cash for a fixer-upper last year. I need the money I’ve invested in this property back to use it as start-up capital for my new business, so I want to refi quickly.”
Hard money loans can refinance properties to free up capital.
17. You No Longer Meet FNMA Guidelines
Example: “I have mortgages on more than 10 properties, and now no longer qualify for more financing.”
When you exceed conventional loan limits, hard money loans can provide the additional funding you need.
18. No Previous Experience
Example: “I have dreamed about flipping a house for years and have read everything I could get my hands on about the industry. It’s time to roll up my sleeves and do it, but I need a lender that is willing to believe in me.” • New investors can use hard money loans to get started when conventional lenders won’t take the risk.
Is a Hard Money Loan Right for You?
Determining if a hard money loan is the right choice depends on your specific project and financial situation and it is important to get advice based on your specific circumstances.
If you need quick funding, flexible terms, or have a unique investment opportunity that traditional lenders won’t touch, a hard money loan might be your best option. Understanding the benefits and drawbacks, and knowing when to use this type of financing, can help you make informed decisions that drive your real estate success.
Hard money loans can be powerful tools for real estate entrepreneurs in California, providing the flexibility and speed necessary to capitalize on great deals and investment opportunities.
By considering the scenarios above and evaluating your needs, you can determine if a hard money loan is the right fit for your next property project.
Your Next Steps
Get educated:
- Download our free ebook, The Flippers Guide to Funding Your Property Empire
- Book a free, no obligation strategy call with one of our experts to talk about the finance options available for your project
- Get advice based on your specific circumstances. Consult your trusted, experienced advisors where required (for example, your accountant)
