It is no secret that interest rates on hard money loans tend to run higher than their conventional counterparts. Perhaps you’ve been dissuaded from seeking a Colorado hard money loan for this very reason. We would like to offer another perspective: even with a slightly higher interest rate, hard money can actually help you save in the long run.
As a real estate investor, your priority is making money. You want the best possible return on every project. To make it happen, you need to be careful about how much you spend on new property acquisition. But do not let hard money interest rates scare you off. There is more to hard money in Colorado than mere interest rates and fees.
Colorado’s property market is competitive and time-sensitive. Therein lies the key to why hard money is such a crucial tool for investors. The savings related to hard money come from three key characteristics: speed, leverage, and access.
Speed: Capturing Profit Others Miss
Speed is the number one characteristic that differentiates hard money from conventional lending. Colorado hard money loans can typically close in 3-10 days once the title is clear. Conventional lending is closer to 30-45 days when everything goes well. When things don’t go well, it could take a conventional bank longer.
How does speed save you money? First, the speed at which hard money operates makes it highly competitive with all-cash offers. Being able to get to closing in 3-10 days gives an investor the ability to win more deals in a shorter amount of time. Closing occurs quickly, there are fewer financing contingencies to worry about, and sellers have more confidence that the deals they make will actually go through.
Hard money also gives you the opportunity to look at distressed and underpriced properties that a bank would never think of financing. Such properties often end up being the hidden gems that other investors miss. They are properties with the potential to generate exceptional returns.
Finally, hard money opens the door to discount deals. Being able to quickly come in and scoop up discounted properties puts you on track to recover the extra interest and points you might pay for hard money. Your return could far surpass the higher cost of a hard-money loan. For example, getting a 10% discount on the price because you can close in a week easily surpasses a few extra points and a higher interest rate.
Leverage: Cash Preservation and Scaling
Real estate investing – whether in Colorado, Idaho, Utah, or any other state – is all about leverage. You start with a small portfolio and build from there. Each property in your portfolio supports the initial investment in another. As momentum builds, a portfolio sustains its own growth. Hard money helps establish that leverage.
Colorado hard money lenders are free to set their own loan-to-value (LTV) ratios. Those ratios tend to be lower than what conventional lenders offer. But here is the major difference: hard money loans are also short term by nature. That means you are tying up your cash for less time when you depend on hard money for property acquisitions.
Consider an interest-only hard money loan with a term of 12 months. The interest-only structure keeps your monthly payments to a minimum. Meanwhile, you are able to arrange a conventional loan to refinance the property after you acquire it with a hard money loan. Within a year or less, you are able to take your cash out of the property and put it into a new one.
Income Generating Properties
Your leverage increases when the properties you acquire begin generating income right away. Income-generating properties, like office buildings and multi-family apartment units, begin adding to equity from day one. Monthly rental income covers your loan payments, maintenance costs, etc. Meanwhile, every monthly payment reduces the balance on your loan while increasing your equity in the property.
That equity can be combined with cash assets to purchase a new property with hard money. Each new property adds value to your portfolio through equity. This is how you scale. It’s all made possible by the short term nature of the hard money loan. Hard money lets you get in, get a new property, and get out quickly.
Access: Acquiring Imperfect but Profitable Properties
Finally, Colorado hard money offers access to properties you could not even look at with conventional financing. Indeed, many of the best opportunities in Colorado are the ones banks will not touch. They involve things like title quirks, unconventional income, distressed properties, etc.
Hard money is asset-based. That means lenders focus on property value and your plan for acquisition. This gives you a big advantage in terms of generating higher returns. Think of it this way: you save with a hard money loan by acquiring properties with a tremendous amount of upside, properties that banks will not look at.
The higher return such properties generate means you are actually spending less to earn more money in the long term. On a dollar-for-dollar basis, the amount of money you spend on a hard money loan, compared to the profit you make, is less than what you might spend on a conventional loan to obtain a property that generates a smaller return.
Tips for Saving Money With Private Funding
You should know that Colorado hard money is furnished by private lenders. What we do is considered private funding. With that in mind, here are a few tips for making the most of hard money in Colorado:
- Keep terms as short as possible; 6-12 months is ideal for most acquisitions.
- Seek out hard money loans structured as interest-only arrangements.
- Look for loans with minimal or no prepayment penalties.
- Look for discounted properties to add to your portfolio.
Those who know little to nothing about hard money focus on interest rates and points, ultimately determining that hard money is too expensive. But once an investor sees hard money in action, things change. A Colorado hard money loan can actually save money by generating a higher return.
FAQs
How can hard money lenders close so quickly?
Being asset base, hard money lending doesn’t require such an in-depth underwriting process. This allows lenders to get things done much more quickly.
Can I refinance a newly acquired property with a conventional loan?
Refinancing with a conventional lender is one of the most common exit strategies in hard money. Colorado investors do it all the time.
Can hard money help me be a more competitive investor?
Yes. Because hard money lenders can close so quickly, investors can be more competitive in both the deals they target and the prices they offer.
How much higher are hard money interest rates?
Hard money lenders are free to set their rates and terms as they see fit. Check with your lender for the actual numbers.
What are the documentation requirements for hard money?
Again, lenders set their own policies. Generally speaking, lenders require considerably less documentation.
