Cash out hard money second position loans are often overlooked as an option for investors. Many times clients are structuring their financing needs without knowing what is possible. Taking advantage of these types of products can be quite beneficial - especially for investors who hold many properties.
These hard money seconds are typically short term solutions to bridge a gap for an immediate financing need. The real benefit to them is the ability to retain a long term loan that may be with a bank and at an attractive rate, while accessing equity quickly. When people think about seconds, typically they only consider the bankable heloc options. Lines of credit on their home. With hard money, however, these seconds can be placed against most types of real estate - homes, rental properties, commercial properties, industrial properties and more. Most property types with the exception of land, typically speaking.
For an investor with an apartment complex, office building or other property that is not a single family residence, obtaining a second position loan through a bank is likely to be a time consuming affair. In addition, it could be time consuming and denied at the end of the day. Private hard money seconds, however, are meant for speed.
Investors in need of capital for a quick closing can take advantage of seconds of this nature. Developers in need of additional capital to complete a project would be another example. Most business or investment needs that are time sensitive can utilize short term equity from existing property.
These loans are not meant to be long term solutions, but rather bridge loans. 12-24 months is they typical term length - although sometimes if the need is there longer terms are available. They are typically interest only loans, so you are not paying high fully amortized payments over a short term loan. Typically they also have no prepayment penalties - so they can be paid off when the capital is no longer needed.
They are more expensive than what a bank may offer - if the bank offers anything comparable. But by leaving the existing debt stack in place, these subordinate loans on a dollar basis can often times be less expensive than refinancing with a new first position loan - both in terms of cost and rate, although it may not make intuitive sense.
Refinancing the entire debt means paying fees based on a percentage of that full amount. Doing a stand alone second reduces the amount of financing - and even though on a percentage basis it is more expensive, dollar for dollar often times it is not. For example, someone owing $2mm on an office building and needing $200k might pay 2% to refinance at $2.2mm. That's $44k. Doing a stand alone second of $200k might cost 5% or more - but 5% of $200k is only $10,000. That's a savings of almost $35k.
In addition, if you have a long term loan at very attractive rates, refinancing that debt and taking a slightly higher rate means you are locked in long term to that higher rate - even if you only need the money short term. Taking the more costly hard money second allows you to keep the lower rate, pay a higher rate on the private money you are using - and then when you no longer need it you pay it off with no penalty and retain your existing loan.
There are many uses for hard money seconds (even thirds) for business and investment purposes, and it's worth exploring those options should you find yourself needing capital on a short term basis. Feel free to visit our website for more information about California hard money seconds, or call us for more information!