What is a hard money loan?

Hard money loans are a type of financing where the loan is secured by an asset, usually real estate. The value of the underlying asset is the primary factor lenders use to determine approval, rather than the borrower's credit score or income, like traditional bank lending.

Private investors and specialty finance companies provide these loans on a short-term basis, usually 1-5 years. Borrowers often use hard money as a bridge when they need flexible, quickly funded financing to rehabilitate or stabilize property in preparation for refinancing into longer-term conventional financing.

Common uses of hard money loans include flipping houses, rehabbing commercial buildings, or providing working capital for real estate investments. Since hard money lenders can fund faster than banks by focusing on the project rather than the borrower, these loans allow borrowers to move quickly when time-sensitive investment opportunities arise.

The tradeoff is that hard money loans typically have higher interest rates and fees compared to conventional bank lending. This pricing reflects the increased risk taken on by the lender as well as the convenience of rapid funding. Like other types of alternative financing, hard money fills a niche for borrowers willing to pay more for speed and flexibility.

Why would a real estate investor pick a hard money loan (asset–based loan) over a conventional loan provided by a bank with lower rates?

There are many reasons a borrower may prefer private or hard money lending rather than more affordable traditional bank financing:

(1) Quick Funding Timeline - Banks generally take at least 45 days to fund a residential loan, 60-90 days for a commercial loan, and over 120 days for a development project. In contrast, a private lender can typically fund deals within 7-14 days.

(2) Financing For Fixer-Uppers - Strict bank underwriting means they rarely finance properties needing heavy repairs or redevelopment. However, private lenders happily provide loans for fix-and-flips or value-add deals as long as the borrower has sufficient equity invested. For example, borrowers can utilize short-term hard money loans to acquire and renovate properties before obtaining permanent bank financing once the asset is stabilized.

(3) Asset-Based Lending - Banks focus heavily on borrower credit scores, debt-to-income and ability to service debt. High net worth borrowers are often declined by banks if they have existing debt obligations. Private lenders emphasize loan-to-value based predominantly on the deal specifics and underlying asset rather than borrower credentials. At Gelt Financial our lending decisions revolve around a target loan-to-value ratio in the 65% to 80% range per transaction.

The speed, flexibility, and asset-centric nature of private money can fulfill an essential niche for real estate investors versus conventional lending sources. Choosing the optimal capital provider depends on the borrower's priorities and project particulars.

What are the interest rates in Columbus, GA hard money loans?

Hard money loans typically have higher interest rates than conventional bank financing but offer greater speed and flexibility. Some key details on rates:

• Interest Rates - Hard money loans generally carry interest rates ranging from 10% to 15%, significantly higher than conventional mortgage rates. Factors like loan-to-value ratio, project risk, and property type impact rates.
• Points - Upfront fees paid directly to lenders, known as "points", are common with hard money loans. One point equals 1% of the loan amount. Investors often pay 2-5 points when originating these loans.
• Term Length - Hard money loans usually have shorter repayment terms of 6 months to 3 years. The shorter timeframe leads to higher effective interest costs.
• Prepayment Penalties - Many hard money lenders charge prepayment penalties if loans are repaid early, ensuring they receive full expected interest payments.

While cheaper financing options are available, they come with longer wait times that can deter investors from capturing opportunities in Columbus's fast-paced real estate market. The benefit of flexible, rapid funding makes hard money loans' higher rates and costs worthwhile for many home flippers and property developers operating in the area. But borrowers should analyze their business model to ensure the numbers pencil with higher financing expenses.

What factors affect the interest rate for a hard money loan?

Several elements converge to determine the interest rate you'll pay on a hard money loan in Columbus:

• Risk Assessment: Hard money lenders focus primarily on the property's value and the borrower's potential to repay. High-risk scenarios (low LTV, poor property condition, inexperienced borrower) usually translate to higher interest rates.
• Your Financial Health: While credit scores are less critical than in traditional loans, lenders still consider your ability to manage debt. A better financial picture can lead to more favorable rates.
• Specific Loan Parameters: The requested loan amount, how it compares to the property's value (LTV), and your proposed exit strategy (how you'll repay the loan) are all factors in the lender's interest rate calculation.
• Prevailing Market Rates: Keep an eye on the broader economic climate and competition among Columbus hard money lenders. These forces can indirectly influence the rates you'll be offered.

Pro Tip: Be prepared to negotiate! Hard money lending is less standardized than traditional mortgages. Comparing quotes from multiple lenders and demonstrating your project's viability can give you leverage in securing the best possible terms.

How fast can a hard money loan close?

While traditional lenders can take weeks or even months, hard money loans have the potential for significantly faster closing times. Here's how it breaks down:

• Speed as a Selling Point: Many hard money lenders specialize in fast closings. They have streamlined processes and prioritize efficiency.
• The Key is Preparation: If you have all your documentation ready (property appraisal, title work, financial statements), closings can often happen in just a few days.
• Contingencies Matter: Simpler deals (cash purchases, no major repairs) close faster than complex scenarios with contingencies.

Important: Don't mistake "fast" for reckless. Reputable hard money lenders still perform due diligence to protect themselves and you as the borrower.

Here's a selection of interesting facts about the Columbus, Georgia real estate investing market:

Affordability and Growth:

Below-Average Costs: Housing costs in Columbus are significantly lower than the national average, making it an attractive market for investors seeking value. This translates to potentially higher rental yields and lower barriers to entry.
Steady Appreciation: Despite the affordability, home values in Columbus have been steadily appreciating, offering opportunities for capital gains alongside rental income.

Strategic Location and Diverse Economy:

Logistics Hub: Columbus is a major transportation hub in the Southeast, with easy access to interstates and international airports. This attracts businesses and fosters a strong logistics industry, creating a stable tenant pool for industrial and warehouse properties.
Diversification: While logistics are a major player, Columbus boasts a diverse economy with growing healthcare, manufacturing, and technology sectors. This reduces risk associated with over-reliance on one industry.

Emerging Markets and Redevelopment:

Up-and-Coming Areas: Several neighborhoods in Columbus are undergoing revitalization, presenting opportunities for investors to acquire properties at competitive prices and benefit from future growth. Research these areas and potential redevelopment plans.
Fort Benning Impact: Home to Fort Benning, a major U.S. Army installation, Columbus benefits from a steady influx of military personnel and their families. This creates consistent demand for rental properties, particularly single-family homes and apartments.

Investor-Friendly Environment:

Favorable Landlord Laws: Georgia has landlord-friendly laws that offer investors a degree of protection when dealing with tenants.
Government Incentives: The city and state of Georgia offer various incentives and programs to attract businesses and real estate development. Explore potential tax breaks, funding assistance, or streamlined permitting processes.

Considerations for Investors:

Competition: The affordability and growth potential might attract more investors, leading to increased competition for properties. Be prepared to act quickly on good deals.
Economic Dependence: While the economy is diversifying, Columbus still has some dependence on the military and logistics sectors. Consider this during your risk assessment.
Foreclosure Rates: Columbus historically has had higher foreclosure rates than the national average. Thorough due diligence and tenant screening are crucial to mitigate risks associated with potential vacancies.

Overall, Columbus, Georgia, offers a compelling market for real estate investors. The affordability, steady growth, diverse economy, and potential for revitalization projects present attractive opportunities. However, careful research, understanding market trends, and thorough property evaluation are essential before making any investment decisions.