Real estate investors work in a lot of different realms, including purchasing fix-and-flips, rentals, and commercial and multi-family properties to generate income. In some markets that have limited real estate stock, new construction is a smart approach. You have less competition for purchasing existing properties, and buyers are hungry for more options.
However, getting a new construction loan from a conventional lender is no easy task, especially if you’re relatively new to it. The process to secure a construction loan is arduous and time-consuming with loan officers looking into every detail of the project, often leading to delays in even starting the project. Hard money lending is a good alternative for real estate investors who need to move fast.
One of the advantages of working with a hard money lender is that they have more freedom than conventional lenders. This includes lending for new construction projects, which are on the rise after a major dip in 2020. Hard money lenders can provide financing for a majority of the project—including purchasing the property—or a bridge loan to cover a gap even if you have other funding sources.
If you’re an investor with options, there are several reasons you might want to get a hard money loan, even when a conventional loan is a possibility.
Hard money loans close fast—in as few as five days—whereas the process for getting a conventional loan can take months. Whether you’re using hard money to finance the whole project or to get a cash infusion at a critical time, you can get it faster with a hard money lender. Delaying the start of a project has financial consequences, including ongoing expenses related to the property and potential further delays as subcontractors focus on other work. Even investors who can get a traditional construction loan often choose hard money because it allows them to get started faster.
Once a project kicks off, a conventional lender doles out cash at certain stages and requires a significant amount of documentation. When you get a hard money loan, you are still subject to a draw schedule, but the process tends to be quicker and more flexible. You have the freedom to start purchasing materials (especially those with long lead times) and engaging subcontractors to get your project going.
Getting a loan from a conventional lender requires jumping through a lot of hoops. Even after you have secured the loan, getting the cash requires a significant amount of paperwork, which can slow down your project while subcontractors wait to get paid. Private firms that manage their own funds allow for quick responses and draws.
Conventional lenders are limited by regulations surrounding borrower qualifications. If you have a poor credit history or other financial problems, you might not be able to secure a conventional loan, even for the most solid investment. A hard money lender bases approval on equity and the details of the deal. If you have enough equity and a clear plan for making a profit and repaying the loan, you can potentially get a hard money loan.
Anybody with equity can potentially be eligible for a new construction hard money loan. Approval is based on both your equity and your ability to complete the project. The application process is easy: Just complete a simple form and be prepared to discuss your project, including the budget.
If new construction feels too intimidating but you want to get started with real estate investing, consider building a portfolio of rentals. Read The Borrower's Guide: Hard Money for a Buy and Hold Investor to learn more about how to get financing for properties that you intend to buy and hold.