One of the key questions that your hard money lender will expect you to be able to answer when you submit your loan request is how you plan to exit, or pay off, the loan. It is essential to have at least one exit strategy for your hard money loan, and it’s not a bad idea to have a Plan B strategy to fall back on as well.

Here are the three most common exit strategies for hard money loans:

1. Use the income from selling the property. This exit strategy is a favorite of investors who want to buy distressed properties at a good deal and then rehab and resell them for a tidy profit. Hard money loans provide access to the fast cash needed to take advantage of opportunities. This strategy requires strong planning and property investment skills in order to maximize your profit after the costs of improvements and funding in the time period covered by your hard money loan. It is not uncommon for hard money lenders to consider an extension of the maturity date if they have a performing loan.
2. Refinance or change over to funds from a new loan. This exit strategy is best when a property is intended as a longer term investment, such as is often the case with commercial and rental properties that can produce steady streams of income. A hard money loan gives you the flexibility to buy an investment property when the opportunity presents itself and the time to line up alternate long-term financing from a traditional lender such as a bank or life insurance company. This can also be an ideal strategy when you’re buying a property that has a high vacancy rate currently or other situation that makes it harder to get approved by a traditional lender for a commercial mortgage.
3. Draw on an alternative source of cash. This exit strategy is usually a “Plan B” option if something unexpected crops up and throws off the original plans. It is possible to use funds from the sale of another property, from other investment capital, or from a new hard money loan. While this is rarely an ideal strategy because it diverts money from its originally intended use, it can buy you necessary time to line up the right buyer or improve a property’s income-producing potential to ensure that you still make a profit on your investment.

Exit strategies are important with any type of loan, but especially with hard money loans, so that you can ensure that the costs of the loan will be covered by your profits from the deal. Savvy real estate investors know the importance of matching the right exit strategy with the right project in order to maximize the return on their investment.