The senior housing market is booming, with its value projected to reach a staggering $109.9 billion by 2028. This presents a golden opportunity for savvy real estate investors, but it also comes with a unique set of challenges. One of the biggest hurdles is financing. Traditional lenders often move at a glacial pace, which can cause you to miss out on a great deal or fall behind on a project. This is where a hard money refinance can come to the rescue. It’s a popular solution for investors seeking a fast, flexible way to access the capital they need.
As a specialist in hard money lending, we understand the unique demands of the senior housing market. We provide swift, asset-based financing that can help you secure your next investment without the frustrating delays of traditional banks. With over 30 years of experience as underwriters and an extensive network of private lending partners, we’ve seen it all. We know the common pitfalls investors face and want to help you avoid them.
In this guide, we’ll walk you through the six most common mistakes we see investors make when seeking a hard money refinance for senior housing. By learning what not to do, you can streamline the process, get the funding you need faster, and ensure your project stays on track.
Mistake #1: Not Having a Clear Exit Strategy
A hard money loan is a bridge. It gets you from where you are now to where you want to be. It’s a short-term solution to a long-term problem. This means that a clear plan for paying off the loan is just as crucial as getting the loan in the first place. Without one, you’re setting yourself up for a major headache.
Failing to plan your exit is a huge mistake. The risks are high: you could default on the loan, face steep interest penalties, or even lose the property you worked so hard to acquire. Hard money lenders need to know how you’ll repay the loan, and so should you.
Plan Your Next Step
Before you even apply for a hard money loan, you should have your exit strategy mapped out. Your plan might be to get a long-term commercial loan from a bank after you’ve stabilized the property. Another common approach is to sell the property after you’ve completed renovations and increased its value. For some, using the rental income from the stabilized senior housing facility to pay off the loan is the best option.
Consider All Refinance Options for Investors
The good news is you have several options for a long-term loan. DSCR loans are popular because they focus on the property’s cash flow, not your personal income. SBA loans can offer favorable terms for owner-occupied properties. FHA commercial property investment loans are another possibility, especially for assisted living facilities. Researching these options beforehand will make your transition to long-term financing much smoother.
Mini-Case Study: Meet John, a real estate investor who jumped into a senior housing deal with hard money. He planned to refinance with a bank, but didn’t realize his property’s occupancy rate was too low for a traditional loan. He ended up paying high interest and was almost forced to sell his property. On the other hand, Sarah secured a similar loan but planned. She knew her property needed to be at 90% occupancy for her bank loan. She used the hard money to renovate quickly, filled the rooms with tenants, and smoothly transitioned to her long-term loan, saving thousands in interest.
Mistake #2: Underestimating All the Closing Costs
When you’re looking at a hard money loan, it’s easy to focus on just the interest rate. But those quoted hard money interest rates are only part of the full cost. A common mistake is not accounting for all the additional fees that come with the loan. These “hidden” costs can quickly add up, making a project far less profitable than you initially thought.
Ignoring the total closing costs of a hard money loan is a surefire way to run into trouble. Unexpected fees can eat into your profit margins, leaving you with less capital for renovations or other project needs. What seemed like a great deal on paper can turn into a financial burden when you realize the actual cost of borrowing.
Get a Detailed Breakdown
To avoid this costly mistake, you must request a clear, itemized list of all fees upfront. A reputable lender will be transparent about their pricing. Don’t be afraid to ask questions and ensure you understand every single charge before signing any documents.
Understand the Fees
Knowing what each fee covers is crucial for budgeting. Here’s a breakdown of the typical closing costs for a hard money loan:
- Origination fees (points): This is a fee charged by the lender for processing the loan. It’s usually a percentage of the loan amount, with one “point” equaling one percent.
- Underwriting fees: These fees cover the cost of evaluating the loan application and the risk involved.
- Appraisal fees: This fee pays for a professional appraisal of the property to determine its current market value. Since hard money is asset-based, this is a critical step.
- Legal and document fees: These costs cover the preparation of all the necessary legal documents and contracts for the loan.
- Prepayment penalties: Some lenders charge a fee if you pay off the loan early. Be sure to ask about this and understand the terms.
Mistake #3: Ignoring the Importance of Loan-to-Value (LTV)
When it comes to hard money loans, the property itself is more important than your credit background. A hard money loan is an asset-based loan, meaning it is secured by the value of the collateral, which in this case is your senior living facility. A key measure used by lenders to decide how much they are ready to lend is the Loan-to-Value (LTV) ratio. The LTV checks how much the loan is compared to how much the property is worth.
Ignoring your LTV is a significant mistake that can be costly. If your property is worth more than it really is, you will likely be given a much smaller loan than you thought. In the worst case, your loan application might not be accepted at all. A hard money investor, unlike a traditional bank, wants to be able to sell the property and get its money back if you don’t pay.
Get a Professional Appraisal
To avoid this trap, the first thing you should do is get a review from a professional. This will provide you with a fair and accurate representation of your home’s market value. You should not depend on your own estimates or what you think the property is worth. A professional appraisal is an integral part of the process that all reputable lenders will require.
Calculate Your LTV Realistically
Once you have a solid appraisal, you can calculate your loan-to-value (LTV) ratio with confidence. This helps you set realistic expectations for the loan amount. The formula is simple:
LTV = (Loan Amount / Property’s Appraised Value) x 100
For example, if a property is appraised at $2 million, and you are seeking a $1.4 million loan, your LTV would be:
($1,400,000 / $2,000,000) x 100 = 70%
Most hard money lenders have a maximum LTV they will consider, often in the 65-75% range. Knowing your LTV upfront allows you to determine if your project is a good fit and helps you negotiate from a position of strength.
Mistake #4: Not Preparing the Right Documents (Even for No-Doc Loans)
It’s not always clear what “no-doc” or “lite-doc” loans really mean. It’s a big mistake to think you don’t need any paperwork at all, even though they require a lot less than regular loans. “No-doc” really just means that the funder doesn’t need to see proof of personal income or taxes. Suppose you don’t have the necessary business and property papers ready. In that case, your application will be held up, and the lender will not trust you.
Not being ready shows that you aren’t serious or prepared, which is the main reason this is a mistake. Lenders of hard money expect their clients to act quickly as well. You can’t promptly give basic property details. If that’s the case, you might not be ready for the terms of a loan. If you do this, it could cause delays or even a straight rejection.
Organize Your Financials
Even for a no-doc loan, you’ll need to have key documents ready to go. The lender needs to verify the property and the project’s viability. Be prepared with:
- Property Deed: Proving ownership is a must.
- Existing Appraisal: If you have one, it can speed up the process.
- Title Report: Shows any liens or issues with the property.
- Clear Business Plan: A well-structured plan outlining your project’s scope, budget, and timeline.
Showcase Your Experience
Lenders want to see that you have a track record of success. Even with an asset-based loan, your experience is a factor. Present your expertise clearly, like a resume for a real estate project. This helps build confidence with the lender and can make your application stand out. Consider creating a concise document that highlights:
- Past Projects: A list of senior housing or other real estate projects you’ve completed.
- Relevant Skills: Experience in construction, property management, or market analysis.
- Team Members: Information on your contractors, architects, and property managers.
Presenting your information in a structured way makes it easy for lenders to review and helps them quickly assess your credibility.
Mistake #5: Choosing the Wrong Financial Partner
Not every loan is the same, and picking the wrong one can cost you a lot of money. A lot of buyers make the mistake of getting a hard money refinance from a big, traditional bank. These banks are great for getting regular loans. Still, they don’t always have the proper knowledge or freedom for complicated senior housing projects. This can cause annoying delays, extra work that isn’t needed, or even the rejection of the loan application.
This is a big mistake because traditional lenders have strict rules they have to follow. They don’t know how assisted living facilities make money, how much memory care rooms are worth, or what mixed-use properties can do. When they see a job that doesn’t meet their strict requirements, they just say no. This could be very bad for your project and the time frame for your spending.
Look for a Specialist
Working with an expert is the best way to avoid this trap. The lender you choose needs to know a lot about the senior home market. It is best to work with a group that has a history of successfully funding assisted living, memory care, and mixed-use buildings. Our team has been insuring for more than 30 years, so they know what to look for and how to make a deal work. Most banks have strict rules that we are not required to follow.
Check Their Network
The lender’s network is another vital factor. A single hard money lender may not have a large amount of capital or may only lend in certain situations. But a financial partner with a lot of different funding sources can give you more freedom and choices. We can find the right private lender for your project, no matter how special or complicated it is, thanks to our network of over 200 lenders. It gives you a significant edge and makes sure you get the best terms and the money you need to succeed.
Mistake #6: Misusing the Cash-Out Funds
A cash-out refinance for your senior living property is a powerful way to manage your money, not a windfall for you. Using these funds for things other than business, like vacations, luxury items, or personal debts, is a common mistake that costs a lot of money. This kind of abuse can ruin your investment and put your home at risk.
It is a big mistake to use the cash-out funds without a clear business plan. Since the money isn’t generating a higher value for the product, the return on investment (ROI) is low. When it’s time to pay back the loan, you’ll have a debt and no asset growth to match, which will make it hard to return.
Invest in Value-Add Improvements
Cash-out funds should be re-invested in the building for the best results. The upgrades should immediately raise the building’s value and income. Thoughtfully use the money for:
- Renovations: Improving rental rooms or shared areas so that higher rents are reasonable.
- New Construction: To make the facility bigger, add a new wing or a memory care room.
- Facility upgrades include adding current features like a commercial kitchen, a therapy gym, or high-tech security systems.
These smart purchases can increase the property’s value, lead to a higher occupancy rate, higher rental income, and make it easier to secure a long-term loan or sell for a profit.
Grow Your Portfolio
Adding to your real estate assets is another excellent way to utilize cash-out funds. This could mean buying a new property or investing the money in a different venture. You can use the funds to refinance a fix-and-flip loan, which will let you quickly fix up and sell another property. Besides senior housing, we can also help with a wide range of other commercial real estate refinancing choices, such as:
- Student Housing: Using the money for something else, such as buying or refinancing a student housing development.
- Nursing Homes: Building more nursing homes to meet the growing need for long-term care.
- Mixed-Use Properties: Giving money to a project that has both homes and businesses.
You can turn a short-term loan into a long-term growth engine for your business by smartly reinvesting the cash-out funds.
Conclusion
Getting around in the world of hard money, it can be hard to refinance senior living, but it doesn’t have to be. You can speed up the process and make sure your project succeeds by not making the six mistakes we’ve talked about, such as not having a clear exit plan and misusing your cash-out funds. Knowing the actual cost of something, understanding the value of your property, and having all the necessary paperwork ready are all essential steps that put you in charge.
Our business knows the unique problems and opportunities that come with the senior home market. We are not just another lender; we are your business partner. With 30 years of experience in underwriting, we can quickly assess your job and provide the funds you need. Our wide range of loan options is made to meet your needs, whether you need a short-term bridge loan to buy a house or a longer-term loan to stabilize a building. We can offer flexible, asset-based loans that standard banks can’t because we have an extensive network of over 200 private lending partners.
Don’t let problems with funding stop you from making your next investment. Contact us right away to set up a free, no-obligation meeting. Let us show you how our knowledge and connections can help you feel confident in the refinancing process and reach your business goals.
Based on the blog’s content, here are five frequently asked questions about hard money loans for senior housing that were not covered in the original post.
FAQs
1. How quickly can a hard money loan be approved and funded?
One of the best things about a hard money loan is how quickly it can be given. Getting a regular bank loan can take months. However, obtaining a hard money loan can occur in just a few weeks or even within 10–14 days. The exact date will rely on how quickly you can send the needed papers and how complicated the deal is. The process goes faster because lenders only consider the asset’s value, rather than your personal funds, for a long time.
2. How does a hard money loan differ from a conventional commercial loan?
The main differences are in speed, flexibility, and cost. Since hard money loans are built on assets, they can be closed much faster, have more flexible terms, and have less strict requirements for who can get them. But the fees and interest rates on these loans are much higher. On the other hand, conventional loans have lower interest rates and longer terms for paying them back. However, they have a more thorough and time-consuming application process that focuses more on the borrower’s credit and financial background.
3. Can I use a hard money loan to purchase a senior housing property?
Yes, without a doubt. Some people use hard money loans to buy new homes. Many people use them to purchase senior housing, especially when they need to move quickly to secure a deal or when the property is a “fix-and-flip” opportunity that doesn’t meet the requirements of a traditional bank. You can get a hard money loan quickly, which can help you in a hot real estate market.
4. Is a hard money loan a good option for an assisted living facility that isn’t yet operational?
Hard money loans are often an excellent option for homes that aren’t making any money yet. Lenders are willing to give loans on properties that are still being built or that are getting major repairs because they look at the property’s future value (called the “after-repair value” or ARV). Their low risk means they are perfect for an assisted living facility that isn’t open yet or doesn’t have many residents. A traditional bank would likely decline a loan for an asset that isn’t stable.
5. Can a hard money loan be structured as a long-term solution?
Not at all. A hard money loan is meant to be a short-term fix, not a long-term one. Because they have high interest rates, they can’t be used for long-term loans. They are meant to be a bridge—a quick way to get money to buy, fix up, or secure a property before switching to a traditional, long-term loan with a lower interest rate. This way out should have been planned from the start.
