Beginner's Guide to Using Hard Money to Buy Rentals

Beginner’s Guide to Using Hard Money to Buy Rentals

June 2, 2022

Produced by:
Carmel Woodman

With over 8 years of expertise, Carmel brings a wealth of knowledge as the former Content Manager at a prominent online real estate platform. As a seasoned ghostwriter, she has crafted multiple in-depth Property Guides, exploring topics such as real estate acquisition and financing. Her portfolio boasts 200+ articles covering diverse real estate subjects, ranging from blockchain to market trends and investment strategies.

A short summary

Hard money loans are an alternative financing solution for many real estate investors, often used for fix and flip projects. However, you can also use hard money loans to finance other types of real estate investment projects. Check out our beginner’s guide to using hard money to buy rentals, as we take you through the options that are available.

Key Points - Using Hard Money to Buy Rentals

For real estate investors who are looking to make purchases using other people’s money, there are multiple options, one of which is hard money loans. While you may have heard of hard money loans as a financing option for fix and flip properties, did you know that you can also use hard money loans when you’re investing in a rental property? Hard money loans for rental properties are a good alternative to mortgages and other traditional loans for a variety of reasons that we’ll get into below, in our beginner’s guide to using hard money to buy rentals.


Why do investors use hard money to finance rental properties?

  • Less stringent application criteria: Hard money loans are provided by private lenders which means that they aren’t subject to the same rules and regulations as traditional loans. Which results in less red tape and an easier application process. For investors who are looking for a smoother application process, hard money lenders can provide an all-online loan process with approval in just minutes.
  • Fast funding: The quicker loan application process and less stringent lending criteria make these loans quick to get approval for, and then funding follows suit. Which means that fast funding is the name of the game for hard money loans. Whether that’s for fix and flip properties or rental properties, very little paperwork is required, and this factor speeds up the process overall.
  • Creditworthiness is less of a factor: For investors who have a lower credit score or aren’t in great financial standing, hard money loans are an attractive option. These loans are based on the quality of the real estate deal, more than the borrower’s credit history. A decent credit score might still be a requirement, however less focus is placed on the borrower’s personal finances, and more is placed on the property itself.
  • Little to no down payment: While traditional loans often require a 20% down payment on a property or more, hard money loans may require less or very little in the way of a down payment. Instead, focusing on using the property as collateral and only lending to investors who are making good deals.
  • Higher loan amount: Hard money lenders are likely to offer loans that are higher than traditional lenders such as banks. For investors this can be a great benefit, as some hard money lenders will even offer up to 100% of the purchase price.

How to find buy and hold hard money lenders

Finding hard money lenders isn’t difficult and there are a few ways that you can go about it:

  1. Search online: These days you can get almost anything you need by doing a quick search online and finding a hard money lender is no different. Do a search for hard money lenders for real estate specifically in your area and you’ll find many options to choose from. This includes searching on social media, you’ll be surprised where you can find information about hard money lenders these days as many people take to social media to talk about their experiences and get recommendations.
  2. Connect with other real estate professionals: Making connections with real estate agents, brokers, attorneys and other professionals in the industry is a good way to find a reputable hard money lender through someone who might’ve used them before.
  3. Real estate investor clubs: These clubs can offer investors a good way to find hard money lenders who may be at meetings to network with potential clients. Alternatively, it’s a good way to get solid recommendations from other investors about hard money lenders.
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Short-term hard money loans vs long-term hard money loans

Short-term hard money loans are typically anywhere between 6 and 24 months, which makes these loans well suited to fix and flip investment properties. The interest rates on these loans are usually between 6% and 8%. The After Repair Value (ARV) is an important part of the loan approval process because these loans are often based on the deal itself. Short-term hard money loans often only require interest payments until a balloon payment is required near the end of the loan period.

Long-term hard money loans, on the other hand, are taken over a much longer period. They can be anywhere between 15 and 30 years, depending on the lender. These loans can have lower interest rates than short-term hard money loans, due to the longer loan terms. Long-term hard money loans are often used to buy rental properties which investors are likely to keep for the long haul to earn passive income. Investors will have a lower monthly repayment on these loans, instead of a balloon payment at the end, like their short-term counterparts.

How to find the right hard money lender

Finding a hard money lender that is best suited to you is another important decision to make. When you’re evaluating your options consider the following factors:

  • Reliability: Check out the online reviews of each lender and make sure that the lender has more positive reviews than negative or ideally few negative reviews. If you can make contact with someone who has used the lender before, that would be a great way to do your homework to decide if they’re reliable and reputable.
  • Funding speed: Depending on your deal, you may require your funds within a certain timeframe. Hard money lenders should advertise their general funding times quite noticeably, so you can check these or ask them, and make a decision from there.
  • Interest rates: Loan rates vary from lender to lender, and between loan types. Do your homework on the interest rates for the type of loan you’re looking for, with each lender. This could be the deciding factor for your choice.
  • Loan terms: Loan terms also vary between lenders, and some may offer a longer loan period than others. Your particular needs will determine the type of loan terms you need, so you can match this with the lender that offers the right loan terms for you.

Final tips for using hard money to buy rentals

Although hard money loans come with higher interest rates, they can still offer real estate investors a good avenue for funding, particularly for rental properties. The advantages to using hard money loans to buy rentals is that the loan process is quicker, it’s often easier to get these loans, you’re working directly with the lender and there are no intermediaries, you won’t need a lot of capital, and you’ll know if your deal is good enough or not because the loan is based on the quality of the deal. Here are some final tips for those who are considering using hard money to buy rentals:

  • Make sure to communicate with your hard money lender often and let them know what’s going on, they’re heavily invested in your project so they will want to know about any problems or delays, and this will establish trust between you and your lender.
  • Be transparent from the outset with regards to your financial status and be honest with yourself when you are setting your budget so that you don’t over-extend yourself financially.
  • If you can put any capital towards the project, do so. This will show the lender that you also have some skin in the game and create more trust.

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