Hard money loans provide an excellent capital source for home investors looking to get their feet wet in the real estate sector. These loans have less stringent approval processes with a faster processing time than traditional lending. With close to a third of Americans having low credit scores, private money lending provides an attractive alternative for real estate investors to grow their portfolios.

It is important to note that hard money loans are short-term in nature, requiring you to pay them off in one to three years. They also attract higher interest rates that lay between 7.50% and 12.50%.

As such, your hard money lender may require you to show how you plan to exit or pay off the loan. Here are five common strategies that borrowers can present to the private money lenders in California.

1. Sell the Property

This exit strategy is a favorite for real estate investors in the fix-and-flip business. You can use the hard money loan to buy distressed properties, rehab them, and resell them for a tidy profit. You can use the proceeds from the sale to pay back your loan during the closing process. You may require proper planning and sound investment skills to ensure that you maximize your profits by the time the loan matures.

2. Use Your Mortgage to Refinance

A hard money lender in California can act as a stopgap to prevent you from losing out on prime property. Residential owner-occupied loans by private lenders are flexible and come with less red tape for the approval process. You can use the hard money loan to purchase the property and use the remaining two to three years to work on meeting the requirements for another loan. Refinancing with a traditional mortgage can offset the high-interest burden, negotiating longer repayment periods.

3. Refinance With a Subprime Loan

You may need to pay off your hard money lender as soon as possible. If your credit issues or other factors bar you from accessing traditional bank loans, you can utilize subprime loans. The interest rates are higher than in conventional lending but with more lenient conditions for borrowing. If a subprime loan isn’t an option, you can refinance with a new hard money loan. This option is only recommended when you have exhausted all other options.

4. Self-Amortizing

Self-amortizing involves making period payments consisting of both principal and interest during the duration of your hard money loan. It ensures that your loan will be paid off by the maturity date. You can create plans to utilize the property to generate income to allow you to make these payments.

5. A Perfect Blend

A combination of two or more of the above strategies can create an effective, blended exit plan. For example, the sale of other assets that are insufficient in fully paying back your hard money lender can lower your LTV and DTI ratios to acceptable levels; your primary lender may be interested in financing the rest.

You may need to have a solid exit plan before presenting your proposal to your hard money lender. You should not restrict yourself to any one strategy, taking advantage of the various options to pay off your loan. For more information on exit planning, contact ARC Private Lending.