Hard money investing involves providing equity-based alternative funding for commercial real estate investments. After the pandemic, there has been a significant increase in conventional lenders’ interest rates, yet their loan process is slow and has strict requirements. This is why several real estate investors try to get a commercial real estate loan from private lenders due to their speed and flexibility.
The high demand for private lenders has given rise to hard money investing. Investors looking to mitigate the challenges of the current economy are investing in commercial hard money lending because it is lucrative and has lower risks. This type of investment is fixed-income yet yields higher returns than other equities.
The Commercial Real Estate Loan Process
Before you invest in hard money loans, you must understand the commercial real estate loan process. Commercial real estate (CRE) loans are used to purchase, renovate, or refinance industrial or commercial properties.
Examples of commercial properties include medical facilities, office buildings, warehouses, multi-rental buildings, and hotels. Investing in commercial real estate debt can be lucrative if you understand and adhere to the following loan process;
Prequalification
As an investor, this is the first step you must take after discussing the loan with the borrower. At this stage, hard money investors gather basic information about the borrower and the property that will be used as collateral for the loan.
In hard money investing, the property value determines whether to proceed with the commercial loan process. Other factors some private lenders require are the borrowers’ credit history and debt-to-income ratio. These additional factors provide a comprehensive understanding of the borrower’s capability of repaying the loan amount.
Loan Application
This is the start of the commercial loan process, and it occurs after the prequalification criteria are met. The commercial real estate investor will complete the lender’s loan application process. This borrower will authorize the check for proof of income, employment, and credit history and submit it to the lender for processing.
At this stage, all parties clearly understand the loan requirements. The private lender will submit a truth-in-lending statement and good faith estimate to the borrower within 2-3 days of completing the loan application process.
Loan Processing
After completing the loan process, lenders will assign it to a loan processor. The processor will order the borrower’s credit report and obtain an appraisal on the property being used as collateral. The loan processor must ensure that all the borrowers’ documents are accurate and complete.
If the initial documents provided are not correct, the processor will ask the borrower for additional documentation and clarification. After the processor has confirmed and cross-checked all the information the borrower provides, the package will be submitted to the underwriter.
Underwriting and Due Diligence
The underwriter’s duty is to evaluate the risk of a loan for the private lender. The underwriter will review all aspects of the loan, including the borrower’s credit, finances, employment, and the real estate asset used as collateral. The underwriter ensures the loan amount does not exceed the collateral property value. They determine if the package submitted by the processor is an acceptable loan for the hard money investor portfolio.
Loan Approval and Closing
If the lender approves the loan, they are to send a commitment letter to the borrower. The letter will outline all the terms and conditions for the commercial real estate loan. After the borrower agrees to the loan terms, the next step is to close. The closing process involves the private lender, escrow agent, and borrower. During closing, the lender will send all the loan documents to the escrow agent to arrange for the borrower to sign and date.
Once the borrower properly executes all loan documents, the escrow agent will send the original documents back to the lender. The lender will wire the funds to the escrow agent, and the agent will record the deed of trust with the county recorder. After recording the deed, the escrow agent will release the funds to the borrower, closing the loan process.
Relevance of Hard Money Investing in Commercial Loans
In this uncertain economic time, investing in commercial real estate hard money funds offers several benefits;
Collateral Based Lending
Investing in commercial real estate debt offers a relatively low risk. This is because the loans you will provide are backed by the value of the property being used as collateral by the borrower. If the borrower defaults, you can take control of the property or sell it to recoup your capital investment. Selling a commercial property can take a lot of time, but If the loan is underwritten properly, you can keep your risk low and gains high.
Professional Management
As an investor, you can gain exposure to valuable real estate opportunities without managing the complexities of private lending. Commercial hard money investment funds are managed by experienced professionals, including the processor and underwriter.
These professionals will conduct thorough assessments of each loan, ascertain the borrowers’ creditworthiness, and ensure they are fit for your lending portfolio. This is why you have to partner with a reliable broker. The broker will be the one to attract borrowers and secure underwriting so you can generate passive income with minimal risks and effort.
Diversification
Portfolio diversification is a major principle of investing. Hard money investing in commercial loans allows you to spread your investment across several property types and geographic regions. By spreading your commercial hard money investment funds, you can reduce exposure to risks associated with specific types of real estate.
Interest rates or financial markets do not directly affect commercial real estate debt funds. By investing in commercial real estate hard money lending, you can reduce your portfolio risk and smooth out returns.
Regular Returns
Hard money investing in commercial loans provides a steady passive income. The hard money funds you invest in commercial real estate generate returns through interest payments and exit fees. Borrowers pay regular interest on the capital loan amount provided monthly or quarterly, depending on the agreed loan terms.
Hard money loan interest rates are higher than those of conventional lenders, resulting in higher profits for lenders. During this period of economic crisis, this provides a predictable source of income compared to stocks and other equities.
Speed and Flexibility
Commercial hard money loans are usually approved and disbursed within a week compared to conventional loans, which can take up to a month. This speed is due to its customizable loan approval process because the hard money funds are provided by individuals or private organizations.
Time is a critical factor in the real estate market. For commercial real estate investors, securing funding quickly gives them the edge to close lucrative deals and expand their portfolio. As a lender, flexibility and speed means you can move your capital quickly and keep it profitable.
Tips for Becoming a Successful Commercial Hard Money Lender
Becoming a hard money lender can be a great way to build wealth if you can mitigate market risk and borrower default. Here are tips on how to successfully generate passive income from hard money investing in commercial real estate loans:
- Research the Market
You need comprehensive commercial real estate market knowledge to thrive in the hard money lending industry. When you understand the local and national real estate market, you will be able to uncover market trends and demands. This information will help you decide which type of loans will be beneficial for you to offer and the best rates to apply.
- Identify Your Lending Capacity
Identifying your lending capacity is key to becoming a successful hard money lender. Consider factors like how long you can afford for your capital to be tied up without it negatively affecting your portfolio. Your lending capacity will determine the type of loan and terms to offer real estate developers.
Hard money loans offer fast closing and flexible terms, and to have an edge as a hard money lender, you have to meet these needs. If you provide loans beyond your capacity and a borrower defaults, you will run at a loss.
- Build Relationships With Realtors
Foster and develop trusting relationships with reputable realtors and brokers. Realtors have first-hand information about properties that are yet to be listed, so a lot of commercial real estate investors tend to partner with them.
By partnering with a realtor, you can build a network of potential borrowers. They can link you up with their clients, who often seek hard money loans to finance their projects. You can move your capital while they help their clients close the deal on their dream properties; it is a mutually beneficial relationship.
Hard Money Investing with Capital Max
Investing in hard money funds can be challenging and rewarding. At Capital Max, we provide alternative financing, including hard money loans for commercial real estate developers or borrowers.
We help individuals secure customizable equity-based loans that meet their needs. If you have any questions regarding hard money investing or our loan process, reach out to us. We can provide you with a comprehensive guide on navigating the essential aspects of hard money investing.