Aug 24
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Understanding Commercial Hard Money Loans: A Comprehensive Guide
Commercial hard money loans are a type of short-term financing often used for business purpose real estate purchase acquisition, renovation, construction or refinance. Unlike conventional loans from banks or credit unions, these commercial loans are typically provided by private commercial lenders. They’re popular among commercial real estate investors who seek quick access to funds without the stringent requirements of conventional lenders.
One major difference is how a commercial hard money loan is secured. Traditional commercial real estate loans are usually made based largely upon the Principal Borrower’s creditworthiness, commercial real estate investment track record, financial wherewithal, and to some extent, collateral strength. In contrast, commercial hard money loans are largely asset-based, meaning that the collateral valuation take precedence over all other factors. This makes them a viable option for borrowers with less-than-perfect credit but valuable property with which to collateralize their commercial hard money loans.
Property types play a crucial role in these loans. From commercial buildings and warehouses to undeveloped land, the range of properties eligible is quite broad. This flexibility can be a lifeline for developers in niche markets looking to secure funding.
Loan size varies depending on the lender and the value of the property. While traditional loans may cap-out based on standard assessments of risk, hard money lenders often look more closely at the potential return on investment of the property in question. This can result in larger loan amounts for high-value properties.
Loan-to-Value (LTV) ratio is another critical aspect. In order to mitigate the increased risk they shoulder, commercial hard money lenders typically lend at 60-80% on standing (already built) properties. However, their LTVs on land or construction projects tends to be in the 20-50% range to minimize their risk in the event of loan default. It’s important to carefully evaluate the Subject Property’s value and its potential ROI before committing to higher leverage. An accurate property valuation can make or break the deal. That’s why the Appraisal–which the commercial hard money lender orders and you pay for–is almost always the most critical component of an asset-based lender’s decision-making process.
Key Elements of Commercial Hard Money Loans
Interest rates for commercial hard money loans are typically higher than traditional loans. This is mainly due to the increased risk taken on by the lender, who doesn’t rely on a borrower’s credit history as much. Currently, typical commercial hard money loan rates are between 6.99% and 15%, sometimes a bit lower, but often even higher for properties, projects and Principals they deem highly risky. On the flip-side, when your property and you as Principal Borrower have higher viability, your interest rate just might be on the lower end of the rate spectrum. So, see how well you qualify.
Commercial hard money loan terms for tend to be shorter, often ranging from 6 months to a few years; however, there is almost never a prepayment penalty for these loans. While traditional loans might stretch over decades, hard money loans are more suited for short-term projects like fix-and-flips, quick turnarounds on commercial property purchase and renovation projects, or even lightning fast cash-out refinances to fulfill your short-term liquidity gaps. Keep in mind that shorter terms can mean higher monthly payments, but they also reduce long-term financial commitment on the borrowing and lending sides of the Closing Table.
Uses of loan proceeds are versatile, including but not limited to acquiring property, renovation, refinancing, or even bridging financial gaps in an ongoing project. The flexibility here is a big draw—borrowers can tailor the loan to fit their immediate needs. However, clearly defining the purpose and ensuring the loan aligns with your financial strategy are paramount.
Evaluating the Costs: Are Commercial Hard Money Loans Really Expensive?
Breaking down the costs involved is a vital step in evaluating commercial hard money loans. While the interest rates are higher, they come with the benefit of faster approval times and less stringent requirements. Besides interest, you’ll likely encounter fees like origination fees, underwriting fees, and sometimes a prepayment penalty. It’s essential to factor these into your cost analysis.
Balancing the benefits against the higher costs is crucial. Yes, the rates are more, but the speed and flexibility often outweigh this downside. For instance, being able to snag a high-potential property quickly can translate into significant profits, offsetting the initial higher costs. A quick gain or a strategic investment turnaround can make the extra expenses worthwhile.
Real-world examples help illustrate the point. Consider a developer who used a hard money loan to purchase a commercial building that needed renovation. Fast access to funds allowed them to buy and renovate the property swiftly, leading to a lucrative lease agreement. The higher interest and fees were easily offset by the rental income and property appreciation.
Maximizing value and minimizing costs is the goal. Look for commercial hard money loans from reputable sources, negotiate terms as much as possible, and articulate your clear, feasible exit strategy / repayment plan. Thoroughly researching and planning can prevent nasty surprises and keep costs in check. Cutting through potential “gotcha” fees and securing favorable terms can turn a good opportunity into a great one. Finally, as always…
Any questions or concerns? Feel free to contact us just about anytime. We’re here for you and we are rooting for your success. Thanks for checking us out and see you @ the Virtual Closing Table!