A hard money loan is a tool to help you invest in property and make a profit. As such, planning your exit strategy for the loan is an important part of your overall plans for property investment. Paying off a loan is often one of the significant expenses involved in rehabbing a property, which means a good loan exit strategy can make the difference between making a great profit or simply breaking even. Here are 3 strategies for paying off your hard money loan.
Hard Money Loan Exit Strategy #1: Use Proceeds From Selling the Property
This is one of the most common strategies for people who rehab and flip properties. A hard money loan gives property investors the ability to purchase distressed properties quickly, taking advantage of good timing to get great deals on a property with a lot of potential. After increasing the property's value through repair and improvement work, the investor sells the property for a significantly larger amount, enabling them to pay off the loan and still make a profit.
Good planning and strong property investment skills are necessary to make this exit strategy work. It takes finding a property with the right potential, investing in the right type and the right amount of work to improve its value, and then finding a buyer within the period of the hard money loan.
Hard Money Loan Exit Strategy #2: Transition to a Different Loan
This strategy is more appropriate for properties which are not intended for fast sale, such as rental or commercial properties. A conventional long-term mortgage may offer a better interest rate, but requires a much longer approval process than many hard money loans. Using a hard money loan can enable an investor to buy a property quickly, giving them time to consider their options and secure the best long-term loan for their needs.
Hard Money Loan Exit Strategy #3: Use Cash From a Different Source
It's also possible to pay off the loan using cash from a different source. An investor can use money from the sale of a different property, or even from a new hard money loan. In many cases this is a last-resort option when the original plans for a property don't go as expected. Using money from a different source can cause disruption elsewhere in the investor's business, by diverting money from its originally intended use. However, doing this can give an investor the time they need to make a profit on the property, especially if they just need a little more time to close a deal.
Exit strategies are important for every kind of loan, and hard money loans are no exception. By using the right strategy to pay off a hard money loan, property investors can use these loans as a tool for making big profits for their business.