Hotel Hard Money Loans
For real estate investors, hotels and motels can be a lucrative investment. Many investors purchase these properties, fix them up, and then either sell them for a profit or retain ownership and earn a profit by booking the rooms and other accommodations that the facility offers; either way, an investment in a hotel or motel can prove to be financially beneficial.
However, acquiring the capital for a hotel or motel can be difficult. The purchase price of the property, closing costs, rehab and marketing costs, and other associated expenses can be exorbitant. Many real estate investors do not have access to this type of capital. While a traditional loan could be used to secure the capital needed, many real estate investors are not keen on the long term life of traditional loans or their credit history isn’t in good standing and will not be approved for a traditional loan. That’s where hard money hotel loans can be useful.
What are Hard Money Hotel Loans?
Hard money hotel and motel loans are similar to standard hard money loans. Hard money loans are short-term loans that are backed by private investors or other entities and predominately, they are used to purchase real estate.
Banks and credit unions that fund traditional loans (also known as soft loans) assess the borrower’s financial standing to determine if he or she qualifies for a loan. The borrower’s credit score, credit history, and other pertinent financial records are examined, and based on this information lenders are able to determine how much risk they are taking if they decide to fund the loan. If the borrower has a good credit score and his or her credit history is in good standing, banks and credit unions will generally approve the loan, as the borrower is seen as less of a risk because his or her credit history indicates that there is a high likelihood that the money lent will be repaid.
Hard money loans work differently. With these loans, lenders aren’t interested in credit scores and history; rather, they are interested in the value of a real, tangible form of collateral; usually real estate. The value of the real estate is important because it determines how much money an investor can borrow; typically, hard money lenders will offer borrowers 65 to 75 percent of the property value. if the borrower fails to make payments on the loan, the lender can call the loan due or foreclose on the property.
Hotel hard money loans work similarly; the hotel or motel the investor is interested in purchasing is used as collateral. The lender calculates the loan-to-value ratio to determine what percentage of the hotel or motel’s properly value will be offered for the loan amount. For instance, if a lender offers 70 percent loan-to-value on a hotel or motel that is valued at $1 million, the loan amount would be $700,000. The higher the loan-to-value ratio, the more risk the lender is taking; therefore, if the loan-to-value ratio is high, there’s less of a chance that financing will be approved, but if the loan-to-value ratio is low, the hard money loan will likely be approved.
Benefits of Hotel and Motel Financing
Hotel hard money loans offer definite benefits for real estate investors. Firstly, credit isn’t as much of a concern, if it’s a concern at all, as the value of the property is what is used to determine eligibility. Secondly, the hard money loan process is much faster than the traditional loan process; borrowers can have access to funding in as little as two weeks, as opposed to the month or more that it can take for a traditional loan to be completed. Thirdly, while the terms are short and the interest rates are high, there’s no prepayment penalty; additionally, the short term of the loan and high interest rate generally aren’t a factor for real estate investors, as they intend to repay the loan in a short period of time.
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