What is a hard money loan?

A hard money loan is a type of financing provided to a borrower by a lender, primarily based on the assessed value of the underlying collateral asset. Unlike traditional bank loans, which heavily consider the borrower's creditworthiness and income, hard money loans focus primarily on the value of the asset used as collateral. Typically, these loans are utilized as short-term solutions, with durations ranging from 1 to 5 years, serving as a bridge to facilitate property acquisition, rehabilitation, or stabilization in various real estate sectors such as commercial, retail, office, industrial, multi-family, or single-family residential properties.

Why would a Norfolk 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 Norfolk commercial real estate 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 Norfolk'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 key factors influence hard money loan interest rates:

1. Loan-to-Value Ratio (LTV): The higher the percentage of the property value you borrow (LTV), the higher the risk for the lender, often leading to a higher interest rate.
2. Borrower's Credit Score and Income: A strong financial profile with a high credit score and stable income can typically secure lower interest rates.
3. Property Condition and Location: The property's overall condition, repairs needed, and location can impact the rate. Desirable areas or properties requiring significant work might come with higher rates.
4. Borrower's "Skin in the Game": Your equity investment in the property (down payment) demonstrates your commitment and reduces the lender's risk, potentially lowering the rate.

Remember: Interest rates for Norfolk hard money loans are typically higher than conventional bank loans due to the faster processing, flexibility, and risk involved. Comparing offers from multiple lenders and negotiating based on your strengths is crucial.

While Gelt Financial can't claim universally "the lowest rates around," we encourage you to reach out for a personalized quote based on your specific loan request. This way, you can compare our offer with others and make an informed decision.

How fast can a hard money loan close?

Hard money loans offer a much-needed alternative when time is of the essence. Here's how the process compares to traditional financing:

• Flexibility vs. Bureaucracy: Hard money lenders focus less on rigid guidelines and more on the overall viability of your deal. This translates to faster underwriting and decision-making.
• Asset-Based Focus: With the property as primary collateral, appraisals happen quickly, often with less formality than conventional mortgage appraisals.
• Collaboration is Key: Work closely with your chosen lender. Their ability to close fast depends on timely communication and clear documentation from you.

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

Military Presence and Stable Economy:

Strong Military Anchor:

Norfolk is home to the largest naval station in the world, providing a stable and reliable source of tenants for office, retail, and multifamily properties. Military spending and personnel contribute significantly to the local economy.
Diversified Economy: While the military is a major player, Norfolk boasts a diversified economy with a growing healthcare, technology, and tourism sector. This reduces risk associated with over-reliance on a single industry.

Growing Market:

Increasing Property Values: Commercial real estate values in Norfolk have been steadily increasing, offering the potential for capital appreciation alongside rental income.
Development Boom: The city is experiencing a development boom, with new construction projects in various sectors like office buildings, warehouses, and mixed-use developments. This indicates a growing market and potential for investment opportunities.

Affordable Market:

Relative Affordability: Compared to other major East Coast cities, commercial real estate in Norfolk offers a lower barrier to entry for investors. This can be attractive for those seeking value and potentially higher returns on investment.
Government Incentives: The city and state of Virginia offer various incentives and programs to attract businesses and real estate development. This can translate to tax breaks, funding assistance, or streamlined permitting processes.

Unique Opportunities:

Waterfront Development: Norfolk boasts a beautiful waterfront with ongoing development projects. Investing in waterfront properties could offer potential for higher rental rates and appreciation due to the desirable location.
Emerging Neighborhoods: Several neighborhoods in Norfolk are undergoing revitalization, presenting opportunities for investors to acquire properties at competitive prices and benefit from future growth.

Challenges to Consider:

Competition: The growing market might also attract more investors, leading to increased competition for properties.
Sea Level Rise: Like many coastal cities, Norfolk faces potential risks associated with sea level rise. Careful research regarding property location and potential mitigation strategies is crucial.

Overall, Norfolk, VA, presents an intriguing market for commercial real estate investors. The combination of a stable military presence, a diversified economy, and a growing market with relative affordability makes it a place with good potential for investment returns. However, as with any investment, careful due diligence and a clear understanding of the market dynamics are essential.