A sound strategy to pay off your hard money loan can make all the difference.
A hard money loan can be powerful tool in the commercial real estate market. The ability to act quickly and show sellers your commitment can put you in the driver’s seat. However, paying off loans can be the most significant expense when rehabbing commercial properties. Those amazing profits you projected could turn into breaking even (or even a bust) without the right hard money exit strategy. Not to mention, most private lenders will require an exit strategy before agreeing to underwrite you—so it pays to be prepared. If you’re not sure if you have a bulletproof strategy in place, ask your lender for advice and how they would improve your plan.
As we know, hard money loans are a short-term borrowing aid (typically 1-3 years), not a long-term funding solution. With that said, let’s take a look at some common exit strategies.
Refinance with a traditional lender or SBA 504
If you’re looking to hang on to the property for a while, a hard money loan could be used to secure the property and buy time to renovate. Then your exit strategy could encompass paying back the hard money loan with traditional, long-term financing. Often hard money is used to bridge the funding gap while you wait for SBA 504 approval—which can take between three and six months. Once the SBA comes in, you can replace your hard money loan without sacrificing speed and purchasing power.
Use revenue from selling property
This is one of the most common methods for folks who are looking to rehab commercial properties. Hard money allows flippers to take advantage of good timing and secure properties with incredible potential. After boosting the location’s value, the borrower sells the property for a larger amount—and just like that, the loan is paid off and the the borrower has made a profit.
Use outside cash source
It’s common for experienced investors to gain access to additional capital from selling properties from other business deals. If you’re investing for a living—and not just on the side—you likely have many irons in the fire, as they say.
Naturally, your hard money exit strategy will much more complex than the above, we just want to get you thinking about foundational methods that work in most lending scenarios. If you have any questions about how to create and customize an exit strategy or would like to discuss hard money loan options, contact us.