The moment you conceive getting a hard money loan to finance your real estate project, be it fix and flip or buying, you should be sure of your exit strategies. While hard money loans come with high-interest rate and are for short term, your lender will also want to know your exit strategy; this determines how you will do the payback. Here are the various exit strategies for hard money loans.
Sell the property and use the proceeds
Real estate investors who do the ‘fix and flip’ often use this method as an exit strategy for hard money loans. The hard money enables such investor to purchase distressed properties quickly, rehabilitate them and sell for an utterly high amount. The proceeds that follow the sales of this property are used to pay off the hard money loan balance. However, this exit strategy takes careful planning and good property investment skill to be achieved. A property with a real potential, proper timing and ability to improve its value while maintaining the cost-effective idea is essential for a successful exit strategy.
Using cash from the sales of other investments
Sometimes, an investor may envisage an inability to pay off a hard money loan as agreed. Using cash from an entirely different source becomes an exit strategy for some investors. An investor can use money from the sale of property other than the one with the hard money loan. Although this hard money exit strategy may hamper some plans or proposals made initially about these funds, it is right to use it to pay off the hard money loan to avoid foreclosure.
Refinance into a new hard money loan
Depending on your record of prompt payment of the hard money monthly fee, you may be allowed to extend the term of the current hard money loan. Of course, the lender may have to charge a fee for this extension. Also, you may need to opt for a new hard money lender with lower rates; this will help you pay off the current loan. Failure to pay the monthly payments may lead to foreclosure; you may not want to miss this.
Refinance into a standard mortgage
As an investor, it is a good exit strategy from hard money loan to refinance to the commercial loan. Although it is a long term loan, it comes with lower rates and can help you pay off your hard money loan. In the beginning, a borrower may fail to meet up with standard loan requirements, but this can be lifted off a borrower’s record after a long while with work to repairs
The fact that hard money lenders come for your property in any case of failure to pay off should make you outline your exit strategies before opting for a hard money loan. When you have a possible exit strategy, you can enjoy the services of hard money lenders while your real estate investment thrives.