Short-term property loans can provide quick access to financing when you need it. These loans are attractive because they generally have faster approval times and more straightforward qualification requirements than traditional mortgages. However, short-term loans also come with higher interest rates and fees. Understanding the pros and cons can help you decide if a short-term property loan is your best option.
What Are Short-Term Property Loans?
Short-term property loans go by bridge, hard money, rehab, and flip loans. But they all serve a similar purpose – to provide financing for real estate investors and developers for less than 12 months.
Some common reasons for getting a short-term property loan include:
Buying Investment Properties
Real estate investors often use short-term loans to close on time-sensitive deals quickly. These loans provide access to capital for down payments and renovations to get investment properties rent-ready.
Rehabbing Fixer-Uppers
Short-term loans fund repairs and renovations for flips and wholesale deals. Borrowers can access lump sums for construction costs. Then, they repay the loan by selling the rehabbed home for a profit.
Bridge Financing
Homeowners in the process of selling and buying can cover both mortgages temporarily with a short-term bridge loan. This allows time to close a new house before the old one sells.
No matter the purpose, short-term property loans offer speed and flexibility. And you don’t necessarily need pristine credit or income to qualify.
Short-Term Loan Options
You’ll find short-term property loans from two primary sources – private and hard money lenders.
Private Lenders
Private lenders are individuals with extra cash to lend. This may include friends, family, business associates, etc. Private lenders offer more flexibility on loan terms. But you need an existing relationship and trust to get approved.
Hard Money Lenders
Hard money lenders specialize in short-term property loans. They lend based on the property’s potential value rather than your credit score. Hard money loans close quicker than bank financing. But they charge higher interest rates and origination fees.
The lender you choose depends on your specific needs. A good broker can match you with reputable lenders that fit your project.
The Pros of Short-Term Property Loans
Short-term property loans provide easy access to capital along with other key benefits:
Speed
The quick funding turnaround gives real estate investors a competitive advantage. Deals can close in as little as a few days with hard money lenders. This nimble financing helps you act fast when opportunities arise.
Flexibility
You’ll find more flexible qualification standards with short-term loans. Lenders focus more on the deal/property specifics rather than your finances. The loan terms are also customizable based on individual needs.
No Seasoning Requirement
Unlike cash-out refinancing, short-term loans have no seasoning requirement. This means you can access equity in a recently purchased property. The flexible policies open more doors for investing.
For these reasons, short-term property loans fill an essential niche. They provide financing that you can only get from small banks.
The Cons of Short-Term Property Loans
Short-term property loans also come with downsides to consider:
Higher Interest Rates
Short-term lenders charge much higher interest rates due to the increased risk and accelerated payoff timelines. Rates often start around 7-12% and increase depending on the deal specifics.
Large Upfront Fees
You’ll also pay hefty origination fees of 2-5% upfront. When combined with higher rates, these fees significantly increase loan costs.
Short Repayment Timelines
Typical repayment terms run 6-12 months. You must refinance into longer-term financing or sell the property to repay the loan. This short window leaves little room for error.
While the access to quick capital is advantageous, it comes at a price. You need to run the numbers to see if short-term financing pencils for your project.
Tips for Getting Approved
As with any loan, lenders need to mitigate their risk. Follow these tips to improve your chances of getting approved:
Leverage Existing Equity
Putting up a piece of real estate as collateral significantly helps offset lender risk. See if you can use equity in current properties to secure the loan.
Have a Solid Exit Strategy
Provide a clear and realistic plan for repaying the loan through selling or refinancing. Convince the lender you can execute within the short repayment period.
Bring in Partners
Adding equity partners diversifies risk across parties. Skin in the game shows you believe in the deal and motivates you to deliver.
Shop Broker vs. Direct Lenders
Brokers have wholesale lending relationships to find you the best terms. But they also charge fees. Going direct cuts costs but requires more legwork.
Following these best practices shows lenders you grasp the risks and are committed to fulfilling repayment obligations. This goes a long way during the short-term lending approval process.
Wrap Up
Short-term property loans provide quick access to capital for real estate investments through streamlined qualification and faster closure timelines. Just be prepared to pay higher interest rates and fees. And have a solid repayment plan lined up before getting approved.
When used strategically, short-term loans unlock opportunities otherwise inaccessible. They facilitate the speed and agility required in competitive real estate markets. But only for experienced investors with the expertise to accurately assess risks. For more information, visit Diversefunding.com.au/short-term-property-loan.