Higher Interest Rates: Understanding the Cost of Hard Money Loans for Commercial Properties
Hard money loans are known for their speed and flexibility, but they also come with one trade-off: higher interest rates. If you’re considering using a hard money loan to finance your next commercial real estate project, it’s essential to understand why the interest rates are higher than those of traditional loans—and how to determine if the benefits outweigh the costs.
Unlike conventional loans that focus on your credit history and financial background, hard money loans are asset-based, which means the primary focus is the value of the property being used as collateral. Because of this flexibility, hard money lenders like Evoque Lending are willing to take on more risk, and in return, they charge higher interest rates.
Why Do Hard Money Loans Have Higher Interest Rates?
There are a few reasons why hard money loans carry higher interest rates than traditional financing options:
- Risk: Hard money loans often involve properties that may not meet the strict criteria of traditional banks. Whether it’s a distressed property or one in need of significant renovation, lenders take on more risk by offering financing. Higher interest rates are a way to compensate for that added risk.
- Short-Term Nature: Hard money loans are usually short-term, ranging from 6 to 36 months. Since these loans don’t last for years or decades like traditional mortgages, lenders charge higher interest rates to make the loan worthwhile in a short period of time.
- Speed of Approval: One of the biggest draws of hard money loans is the quick approval process. In many cases, hard money loans can be approved and funded within days, while traditional loans can take weeks or even months. The higher interest rates reflect the lender’s willingness to approve loans quickly, without the extensive underwriting process used by banks.
How to Calculate the True Cost of a Hard Money Loan
Before deciding whether a hard money loan is the right choice for your project, it’s important to calculate the true cost of the loan. While higher interest rates may seem daunting at first, the ability to close a deal quickly or access funding for a distressed property can make the additional cost worthwhile.
For example, let’s say you find a distressed commercial property at a great price, but you need to close the deal within a week. Traditional financing won’t come through in time, but a hard money loan can. Even with a higher interest rate, the profits from flipping or improving the property could easily cover the cost of the loan, making the higher rate worth it.
Why Higher Interest Rates Might Be Worth It
- Access to Opportunities: The higher cost of a hard money loan can be justified by the opportunities it provides. If you’re able to close quickly on a high-value deal that others can’t, the potential returns can far outweigh the cost of the higher interest rate.
- Short-Term Nature: Since hard money loans are typically short-term, you won’t be paying the higher interest for a long period of time. As long as you have a solid exit strategy, such as refinancing with a traditional loan or selling the property, the higher interest rate is a temporary cost.
- Credit Flexibility: If you have less-than-perfect credit, a hard money loan might be your only option. While the interest rate will be higher than that of a traditional loan, hard money lenders are primarily concerned with the property’s value, not your credit score.
Tips for Managing Higher Interest Rates
Even with the higher rates, there are ways to manage the cost of a hard money loan effectively:
- Plan Your Exit Strategy: Whether you’re flipping the property or refinancing, make sure you have a plan in place to pay off the loan quickly. The faster you repay, the less interest you’ll accrue.
- Negotiate Loan Terms: Hard money lenders are often more flexible than traditional lenders. See if you can negotiate the interest rate or repayment terms to better fit your project timeline.
- Focus on High-Return Investments: If you’re using a hard money loan, it’s crucial that the property has strong potential for appreciation or high rental income. This will help offset the higher interest rates and ensure a good return on investment.
Conclusion: Higher Interest Rates Are Part of the Package
Higher interest rates are simply part of the cost of accessing fast, flexible capital through a hard money loan. But for many commercial real estate investors, the ability to secure financing quickly and close on high-value deals makes the higher rates worth it.If you’re ready to explore your financing options, Evoque Lending offers tailored hard money loans designed to meet your unique needs. Contact us today to discuss how we can help you take advantage of commercial real estate opportunities, even with higher interest rates.