3 Reasons Investors Use Loans for Investment Properties

[Corey Dutton]

Real estate investors can finance their investment properties with debt, equity, or a combination of both. However, there are many reasons why real estate investors go the debt route and seek out loans for their investment properties. Despite the higher interest rates associated with these loans, as compared with owner occupied, here are 3 reasons real estate investors decide to go with leverage:

1. Quick Loan Fundings: A typical hard money loan can close and fund in between 5 to 14 days. In contrast, a bank loan can close and fund in an average of 21 to 45 days. For a real estate investor who must move quickly to take advantage of a good price on a purchase, quick loan fundings are so important.

2. Lower Qualification Requirements: Because hard money lenders are willing to make loans against properties with low or no occupancy, it allows real estate investors to buy undervalued assets and stabilize them, taking advantage of the upside.

3. Opportunity Cost: To have all of their available cash tied up in just one asset would be unthinkable for some real estate investors. Investment property loans allow these investors to make their own cash go further, and thus, many of them were able to pick up a larger number of distressed assets during the Great Recession.

Have you had an experience where a hard money loan or other investment property loan was crucial to your on a real estate transaction? Please share.

Posted by Corey Curwick Dutton, Hard Money Lender

[Corey Dutton]

To answer your questions (see below).

I think most hard money lenders are also looking for at least a 20%-25% down payment, same as a bank loan. On a rehab loan however, some hard money lenders will lend based on the After Repaired Value (also called ARV). This will sometimes provide you with 100% of the purchase price, and 100% of the repairs as a loan. Your cash is used for interest payments and loan fees. These loans can be pretty expensive because of the zero down payment requirements on them. Here are the answers to your two questions:

1. I think hard money lenders are a good option depending on your situation. Many real estate investors will use them to purchase buy and hold rental properties for 1-2 years. Once the properties are stabilized, they can later refinance with their bank at a lower rate for a longer term. Again, it depends on your situation. 

2. Yes interest paid is tax deductible.

3. If a property is vacant or in bad shape most bank lenders will shy away from it. Hard money allows you to purchase the buy and hold, stabilize it, and then go in for a bank loan once the property meets the bank's criteria. In other situations, a real estate investor may have bad credit so they use hard money loans to buy a property and will later refinance once credit scores bounce back.