With the amount of attention, the impact of the rising federal interest rate has on traditional mortgages, car loans, and credit cards, I thought it appropriate to speak to the relationship between the federal rate and hard-money loans. As a hard-money lender in Los Angeles, I want real estate investors to know the effects upon hard-money loans in these interesting times.
The effects of the federal rate on traditional and hard-money loans are as different as the application of these loan programs. Traditional lenders are held to the standards of Fannie Mae and Freddie Mac because these government-sponsored entities invest in the secondary market. Hard-money lenders are not held to these standards and do not sell their loans to investors in the secondary market.
Effects on Traditional Loans
Investors with a long-term hold objective who refinance a hard-money loan with a traditional loan at the end of a rehab project will see a rise in rates. Traditional lenders are federally insured and regulated. Therefore, they must adhere to the standards set by Fannie and Freddie for the loans to qualify for investment in the secondary market.
It is important for a traditional lender to recapitalize and remove the loans and the collateral from its balance sheet. These loans must be collateralized by stable properties with positive cash flow and owned by an experienced investor.
Effects on Hard-Money Loans
An experienced real estate investor knows the practical advantages of a hard-money loan over the short term. Whether the project is ground-up construction, value-add for a long-term hold, or a short-term fix-and-flip, the hard-money lender provides the investor with access to capital.
Hard-money lenders are not directly affected by the changes in the federal interest rate.
The loans are funded with private money, and the lenders can control its approval criteria and rate. A hard-money lender will continue to underwrite to the same criteria regardless of a rate hike and will remain flexible in its loan structures and exit strategy.
With this entrepreneurial spirit, a payment plan can be structured specifically to the investor’s goals and the value-add potential. A lender subject to fiscal policy is a “one-size-fits-all” approach rather than the customization of a loan program that makes sense for the borrower and the project.
The Approval Process
A lender needs to be able to exercise the agility required by an investor to quickly set its project in motion. The value of the hard-money lender’s ability to approve and fund quickly has proven to surpass the higher interest rate. Time is money.
The time between the approval process and the funding date is not weeks or months like a conventional loan. Often, a hard-money loan can close within 5-7 days of approval. The private lender does not have the extra approval layer of the secondary market.
Recognizing the Lending Niches
The niche for the traditional lender is long-term where the investor or homeowner is not looking to sell or refinance in the near future. The time factor is not a consideration during a long-term hold.
The niche for the hard-money lender is the investor’s need for capital to acquire a property and fund a renovation project. At the completion of the renovation, an investor will either refinance the hard-money loan or sell. Regardless of the hold period, time is of the essence to lower the cost of capital.
As a hard-money lender in Los Angeles, I can state that hikes in the federal interest rate do not affect the loan structure or the underwriting process. However, I want investors to know the effects will be at the end of the hold period at the time of refinancing or sale.
The rates on the traditional loan will be higher. However, I am confident that there remains a strong demand for housing, and the availability will continue at its current low inventory level.
During these interesting times, an investor with a long-term hold will need to understand the market area, the levels of the rents, and the effects the rate hikes will have on the lives of its tenants.
These are the areas of uncertainty. The hard-money lending market remains steady.
If you are a real estate investor with questions regarding the hard-money lending market during these rather uncertain times, then you need to work with a reputable and respected hard-money lender in Los Angeles. PB Financial Group is a premier, direct hard-money and bridge lender that has provided quick funding since 2007 and has closed over 2,700 loans. Our objective is to satisfy your financing needs on important real estate projects throughout California efficiently.