Rates may vary per hard money loan provider, but according to Bankrate, the average interest rate of hard money loans for 2020 is 11-13 percent. Nonetheless, it may be anything between 7% and 15% each year, depending on the lender.
Hard money land loans are a method to obtain financing for the acquisition of empty land from private land lenders. Hard money land lenders are an alternative to conventional land loan sources, which may be difficult to come by. If you discover a wonderful piece of land on a website, you may have a hard time finding a lender ready to give you the money to buy it.
Why are land hard money lenders so hard to come by?
Risk, like all other kinds of loans, is a major factor that lenders evaluate before approving a loan. As a general rule, the lower the interest rate given, the less hazardous a loan is considered to be. Lenders perceive land to be highly hazardous, to the point that they will frequently refuse to lend on undeveloped land. More information on the risk-interest rate connection may be found here.
Due to the high degree of risk involved, only a few reputable private hard money lenders are prepared to take empty land as collateral. Above all, private money lenders don’t want to wind up as the owner of an empty piece of land, which might happen if they have to foreclose.
Factors at Risk
1. Costs of Development
Vacant property is the most difficult kind of real estate to sell, since most purchasers are hesitant to purchase it owing to the extensive effort required to develop it. Because there are few individuals willing to purchase land, hard money lenders don’t want to be left with property they can’t sell.
2. Low Earnings Potential
Furthermore, making a living from the land may be difficult. Typically, the only option for a lender to get any sort of revenue from land is for them to sell it right away, which is difficult for the reasons we’ve previously mentioned. If a private money lender is unable to sell the property quickly, they may be forced to pay costs such as property taxes, resulting in a loss of capital. There are numerous more options that hard money lenders would regard to be solid investments with higher revenue potential, as you’ll discover in our article.
3. Hassles Following a Foreclosure
Finally, before empty property can be sold, it must generally be developed. Loans are the focus of hard money lenders, not land development. If a lender becomes the only owner of a property, they are unlikely to have the required expertise or understanding to continue developing the land on their own, necessitating even more money to improve the property so it can be sold. The additional burden of developing the property would be too much for most lenders to bear. Foreclosures are a multi-step headache that lenders wish to avoid.
Private lenders must consider the risk associated with making hard money land loans, and empty property carries a significant degree of risk. As you can see, empty property is difficult to sell, may become a money hole, and may be tough to develop for a lender. There are a variety of reasons why private money lenders are hesitant to take land as collateral, since the last thing they want is to wind up owning the property after it has been foreclosed. As a consequence, hard money lenders for land will be more cautious with loans involving empty property than with loans involving renovated buildings.
When looking for a private money land loan, there are a few things to keep in mind
1. Leverage on a loan
The highest LTV (loan-to-value) that you can get for empty land will be 50%, whether you’re searching for a buy loan or a refinancing loan. There have been a few instances when private money lenders have gone up to a 65 percent LTV for land, but these are very uncommon.
This is only feasible for commercial real estate projects in large metropolitan locations requiring loans of above $2,000,000, and even then only if you are a seasoned and successful developer. Not all lenders, however, are prepared to provide a 50 percent LTV. Some hard money lenders for land may only give up to 40%, while others would only lend up to 25%.
To purchase land, what kind of leverage do I need?
To acquire land, you must have a cash down payment ready to go, which is usually 50% or more of the property’s buying price. It’s a widespread misunderstanding that you can obtain 100% funding for a hard money loan , but this isn’t always the case – here’s why. Cross collateralization is an option if you own another investment property. Some private money lenders may consider this option, in which you utilise the equity from another investment property as security rather than cash.
What are my options for refinancing or cashing out equity for leverage?
You may utilise equity or refinancing to finance up to 50% of the property’s current worth. However, you must use a first-position mortgage, since hard money land lenders would not take a second mortgage on empty land. The usual cash-out refinancing procedure may be found here.
Land status may be divided into four categories.
1. Land that has been covered
Land hard money lenders usually only accept loans for land in urban or suburban areas. Lenders are more likely to accept infill property, while timberland and agricultural land are less appealing to hard money lenders. Covered land is most often used in commercial real estate transactions.
2. Land for Infill
All of the neighbouring lots have been built and have some kind of structure on them, which is referred to as infill land. This indicates that the region has a lot of potential for growth and may be a better investment for a private money lender. Hard money lenders aren’t usually interested in empty properties that are bordered by other vacant lots. Some lenders are only interested in investing in infill land.
3. Land for Timber
Timber land is named from the fact that it is densely forested and resembles a forest. Timber land is only considered by a few lenders, but some would if the LTV is low enough. Typically, the highest allowable LTV is 25 percent or less.
4. Land for Agriculture
Agricultural land, often known as “ag land,” may be used to grow crops and raise animals. Agricultural property is preferred to forest land since it has a greater revenue potential, but only a few hard money lenders would accept it. If you’re searching for a private money land loan for agricultural property, be ready to describe your intentions for the land, such as the kind of crop you’ll plant.
2. Land That Is Covered
Covered land is land where the current buildings and construction on the site will be demolished and destroyed to make way for new development and initiatives. Although the site has been developed, the existing buildings will be demolished once the property is acquired. Some commercial real estate private lenders may accept covered land bridge loans and construction loans.
3. Status of the Land
The land’s status relates to the kind of use it has been authorised for and the stage of development it is in.
Hard money lenders are unlikely to give you a land loan if you don’t have an exit strategy in place and can answer these questions, regardless of the property in issue or any other considerations. Our lenders at www.hardmoneylenders.io are glad to provide you with a no-obligation consultation and answer all of your questions.
4. Interest on Land Loans
Hard money land loans may vary greatly in price depending on area and region, but in most cases, interest rates will range from 10% to 15%, with an origination charge of 2 to 4 points. There are a few instances when private money land loans may be as cheap as 8% interest, however this is typically reserved for entitled property with a low LTV in a desirable metropolitan location. To compare various interest rates, periods, and other factors, utilise our hard money loan calculator.
Regardless of the hard money lender, you will be required to make monthly interest payments. It’s critical to show that you’re financially capable of making these monthly payments right away, especially because empty property doesn’t produce any regular revenue. Another alternative is to request that the lender include an interest reserve into the loan to prevent monthly interest payments, but not all lenders are prepared to do so.
Private money land loans are a fantastic alternative to explore if you’re searching for a loan to buy empty property, despite the numerous variables to consider. Pay attention to the land’s kind, condition, location, and prospective use, and attempt to locate a land hard money lender who can work with your plans. Some kinds of empty property will be simpler to get a hard money land loan for than others, but by paying attention to the facts provided in this article, you should be able to choose a hard money lender that best meets your land loan requirements.
You can choose to apply for a hard money land loan with 14th Street Capital, a veteran lender. Get easy access to no-hassle hard money loans with customizable terms and little paperwork. 14th Street Capital, one of the top hard money lenders for investors, is your leading real estate investment financing option.