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Financing for transactions in the USA

Why USA?

  • Strong economy: The USA has a strong and diverse economy, with many industries and sectors that are performing well and providing a stable foundation for real estate investment. This helps to provide a stable environment for real estate investment and contributes to the long-term growth of the real estate market.
  • High demand: The US real estate market continues to experience high demand, particularly in certain segments and regions. This demand can drive up property values and rental income, and provides a strong market for investment.
  • Strong financial infrastructure: The USA has a well-developed and accessible financial infrastructure, with a wide range of financing options available to real estate investors. This includes low interest rates, various mortgage products, and a range of financial institutions that are eager to lend to real estate investors. This favorable lending environment helps to make real estate investment more accessible and affordable, providing a competitive advantage for those looking to invest in the US real estate market.

The financing problem for international buyers

  • Even with same name, Banks internationally operate as different legal entities with different rules and regulations
  • No track record with local (US) banks, making buyers ineligible for bank financing
  • Legal and tax issues may be challenging for buyers to solve before they can purchase a property
  • Language, culture and goals are other common challenges for understanding and solving financing challenges for international buyers

The solution hard money loans

Hard money loans are a type of real estate financing that is secured by collateral, typically the property being purchased or renovated. They are often used by real estate investors who need quick access to funds or who cannot qualify for traditional bank loans.

  • Brief history of hard money loans in the USA: Hard money loans have been used in the US since the 1950s, but they became more popular in the 1980s and 1990s as real estate investing became more widespread.
  • Benefits of using hard money loans for real estate financing: Hard money loans can offer several benefits over traditional bank loans, including faster access to funds, more flexibility in loan terms, and financing for non-traditional properties or borrowers who may not qualify for conventional loans.

How it works?

  • Overview of the lending process: Hard money loans are typically issued by private lenders or small lending firms. Borrowers apply for a loan and provide information about the property they plan to purchase or renovate, as well as their own financial history and creditworthiness. Lenders evaluate the loan application and determine the loan amount, interest rate, and other terms.
  • Eligibility requirements for borrowers: Hard money lenders typically have fewer eligibility requirements than traditional banks, but they may require borrowers to have a certain level of equity in the property, a good credit score, or some level of real estate experience.
  • Collateral requirements: Hard money loans are secured by the property being purchased or renovated, and lenders may require a certain level of equity in the property or other forms of collateral.
  • Loan terms and interest rates: Hard money loans typically have shorter loan terms than traditional bank loans, ranging from a few months to a few years. Interest rates are generally higher than traditional bank loans, but may vary depending on the lender, collateral, the borrower’s informal creditworthiness, and other factors.

What can be financed?

  • Residential properties: Hard money loans can be used to finance the purchase or renovation of residential properties such as single-family homes, townhouses, and condos.
  • Commercial properties: Hard money loans can also be used to finance commercial properties such as office buildings, retail spaces, and warehouses.
  • Investment properties: Hard money loans are often used to finance investment properties, such as rental properties or properties that are being flipped for a profit.
  • Fix-and-flip properties: Hard money loans are particularly well-suited for fix-and-flip properties, where investors purchase a property, renovate it, and then sell it for a profit within a short period of time.

What are main advantages?

  • Speed of funding: Hard money loans can be approved and funded quickly, sometimes within a matter of days, which is ideal for real estate investors who need to close a deal quickly.
  • Less stringent eligibility criteria: Hard money lenders are typically more interested in the value of the property than the borrower’s credit score or financial history. As a result, they may be more willing to lend to borrowers who don’t qualify for traditional bank loans.
  • Flexibility: Hard money loans can be customized to meet the borrower’s specific needs. For example, they can be structured with interest-only payments or balloon payments, which may be beneficial for some borrowers.
  • No prepayment penalties: Unlike traditional bank loans, hard money loans typically don’t have prepayment penalties, which means borrowers can pay off the loan early without incurring additional fees.

What are main disadvantages?

  • High-interest rates: Hard money loans typically have higher interest rates than traditional bank loans, often in the double digits. This can make them expensive, especially if the loan term is long.
  • Short loan terms: Hard money loans usually have short loan terms, typically between 6 and 24 months. This can be challenging for borrowers who need more time to complete a project or refinance the loan.
  • High fees: In addition to high-interest rates, hard money loans often come with high fees, such as origination fees, underwriting fees, and appraisal fees. These fees can add up quickly and make the loan more expensive.
  • Collateral requirements: Hard money lenders require collateral, usually in the form of real estate, to secure the loan. This means that if the borrower defaults on the loan, the lender can foreclose on the property to recoup their investment.
  • Risk of predatory lending: Some hard money lenders engage in predatory lending practices, such as charging excessive fees or structuring loans in a way that makes it difficult for the borrower to repay the loan. It is important for borrowers to do their due diligence and work with reputable lenders to avoid falling victim to predatory lending practices.

Examples - Commercial property purpose loans

       Private Money Loans

  • 1, 2, 5, and 15-year programs
  • Rates start at 8.99%
  • Up to 75% loan-to-value (LTV)
  • Investor to owner-user
  • Asset-based or Debt Service Coverage Programs (DSCR)

       Institutional Loans

  • 12-month bridge to 20-year amortization
  • Rates from 7.50% and up
  • Up to 75% loan-to-value (LTV)
  • Vacant to fully stabilized programs
  • Investor to owner-user

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