How to Get Your Hard Money Deal Funded
Learn what lenders look for and how to make sure your next deal goes through successfully.
Investing in commercial property can be exciting. The additional cash flow, the relatively open playing field, an influx of affordable property managers, and usually a larger payoff in the end—all make for compelling reasons to get involved with commercial deals. However, many first-time investors run into problems simply getting their deal off the ground with funding. Let’s review a few simple guidelines to keep in mind when applying for financing.
Bring a down payment
Lenders want to know you’re committed and stand to lose a good deal if the project goes into default. This is why hard money lenders typically offer a lower loan-to-value (LTV) ratios than bank lenders because it ensures that the loan will have enough equity to be paid off in foreclosure, if necessary.
Depending on the property and your investment experience, most commercial lenders like to see at least 30 percent down. If your own money comes up short, many lenders suggest finding another investor or partner to provide a portion of the down-payment.
One option would be to find an investment partner or group who is motivated and willing to put up some, or all, of the cash in an equity-sharing partnership. Another popular avenue is using company assets (such as accounts receivable, other properties, inventory, and equipment) as collateral in the deal. Collateral is essentially an asset lenders use to secure the loan. When funding is provided, lenders place a lien on the asset(s), and if the borrower defaults the lender can seize the collateral to help recoup any losses.
Sell yourself and your deal
Show potential lenders a history of successful investments and deals you’ve completed. This will get your foot in the door with most private lenders—and from there it’s a matter of selling your deal to the lender. While lenders do prefer borrowers with experience in the commercial real estate market, having successful projects under your belt isn’t the only qualifier. Be ready to present the circumstances of your plan in a clear and organized fashion. What is the potential value of the property you want to purchase? Look into the history of the location and neighborhood and get prepared to prove the property and location are a safe investment.
Show your capacity and motivation to repay
While bank lenders use your credit score to determine your ability to repay a loan, hard money lenders are much more likely to look at the income-producing potential of a rental property securing the loan or at the after-improvement value of a distressed property. Regardless of your credit score, what matters is that you show your lender that you have an exit strategy (see our previous blog on common exit strategies) and a plan to make your project profitable enough to repay your loan.
To help secure and land deals borrowers love the speed at which hard money loans can be completed—however, they don’t always have the best interest rates. Needless to say, hard money loans are generally pretty short in terms of length and one of the primary qualities lenders look for in a borrower is the motivation to repay quickly. Be sure to outline your exit strategy to potential lenders during application process so lenders can see the potential to use those funds again in the near future—rather than having it tied up in a foreclosed property for months or even years.