In the construction business, money makes the world go ’round. Without it, you can’t secure land or a team of contractors to build or renovate a property.
However, some commercial construction projects don’t go over so well, which can leave you with blemished credit. When this happens, it can be a lot harder to qualify for traditional business loans.
If you’re in a similar scenario, then you may require a hard money loan. These are non-traditional, alternative sources you can use to fund your next commercial construction project.
Let’s review what hard money loans are and how you can obtain one.
What Are Hard Money Loans?
When you’re unable to qualify for a traditional loan for financing your real estate projects, you can consider a riskier asset-based loan. These are hard money loans.
Hard money loans are ideal to use when you have no more lines of credit, yet you’re ready to invest in a deal. The way you obtain one is through a private investor, mortgage company, bank or the Small Business Administration.
It’s best to use hard money loans for emergency funding because they come attached with high-interest rates.
The Qualification Process
Now, in order to qualify for a hard money loan, you don’t have to showcase your creditworthiness – like with other loans. What the lender wants instead are hard assets to secure your loan.
This is called collateral. If you have enough collateral to cover the cost of the loan, the better your chances of getting approved. Do note that your credit rating is considered, but not the ultimate determining factor in your qualification.
In most cases, the entire value of the collateral you offer isn’t used. The lender will instead use a loan to value ratio to determine the amount you qualify for. Loan to value ratios determines the percentage of the value of the property.
Say the collateral you have doesn’t secure the entire loan. In this case, you’ll have to give personal assets to secure the rest.
More About Loan to Value (LTV) Ratios
In order to determine the loan to value ratio of a property, you must divide the loan value by the appraised value of the property. The key is to come out with a low ratio. The higher it is, the harder it will be to get a hard money loan.
In most cases, lenders will only lend about 70% of the property’s value. The LTV ratio is what determines the risk of a loan.
Here’s an example: You have a new commercial construction project that costs $125,000. However, you need a loan for $90,000 to invest in the project. You go to a hard money lender that calculates the LTV.
It turns out to be 72% based on the following: $90K/$125K = .72.
The guidelines of the lender will determine whether they will give you the full 72% or just 70%. If the lender refuses to give you the full 72%, then you can try another hard money lender.
What Are the Interest Rates Like?
As we already mentioned, the interest rates for hard money loans are typically higher than traditional loans. This is because the risk of hard money loans is also greater.
The terms of hard money loans are also less favorable than what you’ll find with traditional loans. On that note, the interest rates for hard money loans can range around 12%, depending on the market.
However, there are times when it can reach as high as 29%. Small business owners also have to dish out between 4% and 8% in points. In most cases, hard money lenders won’t fund your commercial construction project if it has an LTV above 70%.
And you may have to make a balloon payment before the end of the loan, which normally has a term between 1 and 5 years.
What Can Hard Money Loans Be Used For?
You can use hard money loans to purchase all sorts of property. This includes single-family, multi-family, commercial, land and industrial properties.
Others may use it to fund fix and flip projects, which is quite popular today. This is when you purchase a fixer upper, renovate it and then put it back on the market to sell. In the best of scenarios, you’re able to quickly purchase and fix up a property and resell it within weeks or months.
It’s important to find a lender that specializes in commercial construction, so they have experience and are comfortable with what you’re doing with the funds.
Since you’re in the commercial construction field, you’ll find hard money loans are ideal for most of your construction projects. However, you can also use them for purchasing land for your construction.
Finding a Hard Money Lender for Your Commercial Construction
Now, there are various ways you can go about searching for a hard money lender. The most obvious way is to do a search on Google. You’ll come up with a list of individual companies and hard money lenders.
Make sure the lender you decide to do business with is familiar with funding commercial properties and offers the best rates and terms.
Interview each lender before committing to one. Weigh the pros and cons to see which comes out on top.
Get Fast Funding for Your Commercial Construction
When it’s all said and done, getting money quickly to invest in a commercial project is key. This means you need a lender with a quick qualification process.
At Realty Resources Corporation, we have real estate brokers waiting by to help you with your loan application. We’ve been around since 1976, helping investors fund commercial, industrial and residential projects.
If you’re in Georgia and need help with funding the construction of a commercial building, we can design a loan just for you. Contact us today to begin your application.