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How Do Hard Money Loans Work in California and What Do They Cost?

Selecting the appropriate financing method for your commercial real estate investments is crucial. Regardless of the type of loan you opt for to fund your commercial property, collaborating with commercial real estate hard money lenders is advisable. This approach is often more advantageous than relying on traditional lenders who prioritize your creditworthiness.

What are hard money loans in California?

Hard money lending is an excellent option when it comes to asset-based lending. The property’s value is the primary factor in loan approval. The lenders are more interested in the asset’s potential value and marketability than the borrower’s credit score. It is suitable for real estate investors looking to close deals quickly. Hard money loans are structured to facilitate quick approval and distribution of funds.  It is often closed within a few days or weeks. The instant arrangement makes it suitable for real estate investors looking to close deals quickly. The typical applications of hard money loans in California.

• Fix-and-Flip Projects: Investors buy, renovate, and sell the property for profit.
• Bridge Loans: Temporary financing that covers immediate needs until long-term financing is obtained.
• Land Acquisition and Development: Financing for land purchases and initial development phases.
• Commercial and Investment Property: Financing for purchasing or refinancing non-owner-occupied real estate investments.

How much do hard money lenders charge in California?

Hard money lenders often have fewer restrictions and are more flexible than traditional lenders. They may consider other factors like the borrower’s real estate experience, the nature of the property, and the investment potential.

Hard money loans are subject to some origination fees that may range from 4% to 5% of the loan amount. These fees are charged upfront for processing and setting up the loan. For instance, a loan of $200,000 with a 4% origination fee would incur a $8,000 fee. The other Potential Fees involved are underwriting fees, appraisal fees, inspection fees, document preparation, and processing fees. It may range between $1000 to $3500 as a whole! Example of Typical Costs for a $200,000 Hard Money Loan

• Interest Rate: 10% (for 12 months) = $20,000`
• Origination Fee: 4-5% = $8,000 – $10,000
• Appraisal and Inspection Fees: $700
• Total Cost (excluding any principal repayment): $24,700

These loans, though costly, provide flexibility and quick approval times, making them useful for real estate investors or those needing fast financing for short-term projects.

How long is a hard money loan?

The term of hard money loans Terms is generally short, ranging from 6 months to 3 years, although they can sometimes extend up to 5 years – and in some cases as long as 30 years. Typical the hard money lending terms in California are:

• 6 to 12 Months: Most common for fix-and-flip projects where investors plan to quickly renovate and sell the property. Borrowers planning to refinance with a traditional loan or sell the property quickly may choose a 6 to 12-month term.
• 1 to 2 Years: Used for projects that require more extensive work or longer marketing time. Fix-and-flip investors tend to prefer shorter terms, while long-term investors might seek 1–3-year terms.
• 3 Years or More: Less common, but some hard money lenders may offer longer terms, particularly for buy-and-hold investment properties or bridge loans. It is available for repayment or refinance the loan within a short timeframe,

These loans are usually intended as a temporary solution before refinancing with a traditional lender or selling the property. Interest rates on hard money loans are typically higher than conventional loans, often ranging from 10% to 15% (or more) due to the higher risk and shorter loan duration. Loan origination fees and other upfront costs are also higher. However, the rates may vary based on the loan’s risk level, borrower experience, property type, and loan-to-value (LTV) ratio.

Joe