Hard money loans are an REI’s best funding tool for most types of investing, especially fix and flip investing.
But there are a number of investing situations where hard money loans just don’t make sense, and investment rental properties are one of those situations.
I still get tons of questions about why hard money loans for rentals don’t work, but the confusion is understandable. If HMLs work for fix and flips, why not rentals? Right?
That’s exactly what I’m going to explain in this post. It will be crystal clear when you’re done reading.
How Hard Money Lenders Calculate Your Loan Amount
The first reason why hard money loans don’t work for rentals has everything to do with the loan amount you want.
As you probably already know, hard money lenders determine your loan amount based on the property’s After Repair Value.
The more repairs you put into the property, the higher the ARV. The higher the ARV, the higher your loan amount. Following so far?
The issue with rentals is that they see fewer repairs than permanent residence properties. So naturally, hard money loan amounts for rentals tend to be low because the ARV is low.
The Problem:
- The investor probably won’t get the full loan amount they need to make the deal happen.
I say this speaking generally. If the investor has enough of their own capital to fill the gaps, then that would be an exception. But such cases are rare.
ROI is a Timed Race
In any investment deal, scoring a profit always breaks down to a race against the clock.
Time is money in REI, and unfortunately, investment rental properties have a timetable all their own that doesn’t jive well with hard money loans. Here’s why . . .
Hard money loans make it possible for investors to get into deals when there are no other options, but, by necessity, hard money loan costs have to be higher than the costs of traditional loans.
This works out just dandy for fix ‘n flips because flips are engineered for fast turnaround. You buy the property, repair it and flip as fast as possible before that loan interest starts to add up.
On the contrary, profits from investment rental properties usually trickle in slowly and lose the race against interest rates.
The Problem:
- The investor does not make enough profit fast enough to keep up with the loan interest.
Exceptions to the Rule
Like with everything, there are exceptions to what I’ve explained here.
DoHardMoney very occasionally issues loans for investment properties under special circumstances, but 99% of rental deals that come our way don’t make it past the pre-approval stage.
If you’re dead set on investing in rentals, my suggestion is to seek an alternative funding option. But if you’re looking for investments with fast turnarounds and big payoffs, I’d say stick to fix and flips and get those deals funded with hard money loans.
To see how all of this works, register for our next webinar.
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