Why Those ‘Other’ Loans Don’t Work for Property Investors

Why Those 'Other' Loans Don't Work for Property Investors

Hard money and bridge loans are designed for a very specific clientele with somewhat unique goals. For instance, the majority of loans we make go to property investors looking to generate income from commercia real estate investments. A hard money loan is perfectly suited to helping them meet their goals, despite higher interest rates and shorter terms.

Take a look at a few online posts written by financial experts not involved in the hard money industry, and you are bound to see recommendations for other financing options. In other words, the authors of such posts attempt to point readers to other types of loans. But when you get right down to it, those other loans don’t work for property investors.

FHA and VA Restrictions

Two of the more common recommendations for other loans are FHA and VA loans. Both types of loans are fine for people looking to buy a duplex or triplex, then live in one apartment while renting out the others. But any other property investment is not allowed by FHA or VA rules.

An investor cannot use an FHA or VA loan to purchase any commercial property whatsoever. As for residential properties, the two types of loans are only applicable to houses that will be occupied by at least one of the borrowers listed on the mortgage. So right off the bat, FHA and VA mortgages are off the table. They do not help real estate investors looking to invest in commercial properties.

Small Business Loans

Given that investing in certain types of properties can be structured as a small business, some experts recommend investors try to get Small Business Administration (SBA) loans. Only on rare occasions would an investor be successful financing projects this way. There are too many restrictions in play.

Not only that, approval and funding take far too long in the business loan arena. Most of the real estate investors we work with have time-sensitive needs. They are looking for loans to be approved and funded in a matter of days, not weeks or months. So while the SBA loan might be ideal for some types of business needs, it doesn’t fit very well with real estate investing.

Home Equity

When experts point investors to the home equity lines of credit, what they are generally thinking of is buying a second home. A borrower might consider that an investment, but it is not the type of investment we deal with as hard money lenders. Our clients are not purchasing second homes that they plan to rent out 48 weeks per year.

It is not unheard of for hard money lenders to fund loans worth millions of dollars. No real estate investor is going to get that amount of money out of a home equity line of credit. It is just not reasonable. Even $500,000 would exceed what a home equity loan could support.

Different Kinds of Investors

What it all boils down to is this: online posts pointing investors to other types of loans are addressing casual investors who might be looking at purchasing a second home or buying a large home that has been subdivided into several apartments. Their posts do not address the professional property investors we work with.

An investor looking to put serious money into commercial property really has one of two choices: a traditional bank loan or hard money. More often than not, they choose hard money because there is less paperwork involved, hard money is asset-based, and loans can be funded very quickly. None of those other loan options even come close to matching what hard money can do.