Primarily used in real estate, hard money loans are short-term financing solutions often chosen for property flipping or securing urgent funding. Understanding common exit strategies for hard money loans helps the borrower successfully navigate the repayment process without penalties or loss of property.
Here are some of the most common exit strategies to consider when taking out a hard money loan.
Selling the Property
If the borrower has purchased an underperforming property to renovate, improve, and flip, selling it once the improvements are complete can generate sufficient proceeds to pay off the loan.
In many cases, the primary reason for using a hard money loan is to finance a fix-and-flip project, to quickly resell the property for profit. Alternatively, borrowers may choose to sell directly to another investor, often at a discounted rate, to quickly exit the loan and recover funds. Both strategies enable a successful repayment of the loan and prevent penalties or financial strain.
Refinancing the Loan
Refinancing involves replacing the hard money loan with a traditional loan, such as a conventional mortgage. This strategy is most often used by borrowers who have improved their property’s value through renovations or market changes, making them eligible for more favorable lending terms from a bank or credit union.
Refinancing allows borrowers to pay off the hard money loan and transition into a longer-term, lower-interest loan, giving them more time and flexibility to complete the project or hold the property as an investment.
Cash-Out Refinance
A variation of the refinancing strategy is the cash-out refinance. This method involves borrowing more than what is owed on the existing hard money loan. With a cash-out refinance, the borrower can access extra capital while using the new loan to pay off the hard money lender.
The cash received can be used for additional investments, property improvements, or other personal projects. While this strategy can be beneficial for obtaining more funding, the borrower needs to make sure the new loan’s interest rates and repayment terms align with their long-term financial plans.
Property Income
For some real estate investors, the exit strategy doesn’t necessarily involve selling the property. Instead, the strategy may be to retain ownership of the property and convert it into a rental income property. Once the hard money loan is repaid or refinanced into a more manageable form of financing, the borrower can hold onto the property and generate rental income.
This can be a good long-term strategy if the borrower is looking to build a sustainable stream of passive income from their real estate holdings. Depending on the rental market, this option may offer a steady cash flow while building long-term wealth.
Loan Extension or Renewal
Many hard money lenders offer the ability to extend or renew a loan before it matures. The lender will typically require a fee or a slightly higher interest rate for the extended term, but it gives borrowers additional time to finalize their property sales, improvements, or refinancing process.
However, it’s important to note that loan extensions often come with additional costs and should only be considered if the borrower believes they can successfully execute a new strategy with the extended time.
At Hard Money Georgia, we provide expert advice and flexible solutions for borrowers navigating the hard money loan process. Contact us today to learn how we can assist with your next project.