Learn To Be A Fix & Flip Investor

Saturday, September 14, 2019

THE 411 ON HARD MONEY INVESTMENT LOANS

There are several reason to contemplate getting a hard money investment loan instead of a conventional loan.

There are pros and cons when it comes to absolutely every decision in the world you will make—and when it comes to your money it is crucial to reflect on both the pros and cons. Investment loans are an amount of money lent to finance a particular project. Investors have choices when it comes to the type of lender they want to work with—generally, they will work with either a traditional lender or a hard money lender.

Hard money investment loans have a lot of benefits for investors. Convenience for one—because of the new regulations on mortgage lending implemented as part of the Dodd-Frank Act, applying for a conventional mortgage is terribly time consuming. On average it takes about 45 days to close on a loan with a conventional mortgage. And that is “average.” It can take up to 90 days if there are any type of hang ups—which there almost always will be. This excessive wait time puts investors at risk of losing their deals. A hard money investment loan can typically be funded within two weeks.

Because hard money investment loans are available through private lenders there is more wiggle room when it comes to loan terms. Hard money lenders don’t use a traditional underwriting process which allows more flexibility. Investors may even be able to tailor the repayment schedule to their needs—and may be able to get certain fees waived depending on the lender.

In a hard money investment loan the property typically serves as the collateral. That can be a pro or a con depending on the unique situation of the investor. However, because hard money lenders are able to be more flexible they may allow investors to secure their loan using their own personal assets such as their personal residence. Hard one lenders look at each project individually and work with investors to make the repayment and terms work for both of them.

It is always important to pay attention to the rates and terms in any financial dealings. With a hard money lender, investors have an opportunity to mold their loan to their goals, which can be helpful.

Hard money investment loans are a great fit for investors who need funding quickly with flexible terms and repayment schedules.

Conventional loans come with a whole lot of red tape that investors generally don’t have time to deal with. The bottom line— investors can know their lender, work with their lender and form a real relationship with their lender and that can be priceless.

Dennis Dahlber Broker Ri CEO Level 4 Funding LLC

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO

NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
© 2019 Level 4 Funding LLC. All Rights Reserved.

ALL ABOUT PRIVATE MONEY LENDERS

Private money lenders issue short-term loans for investment properties. These lenders are non-institutional lenders that are sometimes referred to as “hard money lenders.”

Private money lenders typically work with real estate investors looking to purchase and renovate a property; this is also known as a fix and flip. However, private money lenders can help in other situations, as well—such as log-term buy-and-hold investors. Private money lenders can come from a variety of circles— they can be family members, colleagues and acquaintances and, the largest branch—investors and hard money lenders. Basically, a private money lender can be anyone, other than a traditional lender, that is willing to loan money on a property. Because friends and family members can arrange any type of term under the sky with a borrower—in this article we will focus on hard money lenders.

Investors work with private money lenders for two main reasons: short-terms and quick cash. Competing with an all cash buyer is difficult if you don’t have cash yourself. Typically, private lenders will have funds available to the borrower within 10 days. Sellers are aware of how hard money operates and so they are armed. With the knowledge that rarely are there any setbacks when entering into a deal with a private money lender. Bottom line—they know they will get their money and get it quickly.

Investors tend to work with private money versus banks and credit unions because of the short terms. An investor wants to buy a property and sell that property. They don’t want to keep it for years—typically, just a few months. These loans have terms between 6 months and 3 years and interest rates range between 7% to 15%. Generally, private loans don’t carry an early payment penalty, which is great for an investor that sells earlier than expected.

However, there are other reasons borrowers choose to work with a private money lender. Long-term investors that are unable to qualify for a conventional mortgage, but plan to work on their credit and will refinance once those qualifications are met will benefit from the less rigid qualifications of a private money lender. Buy-and-hold investors who are looking to rehab a property before refinancing with a conventional loan can benefit from the flexible terms these loans offer.

Interest on a private money loan is generally assessed as interest only payments. What that means is the borrower will only pay interest throughout the life of the loan and pay a balloon payment at the end of the loan. It is not uncommon to see that, although the interest rates on private money loans are higher than a conventional mortgage, the monthly payments will actually be less. This would be helpful in a situation such as a buyer that is waiting for their house to sell and can’t afford to pay two mortgages.

Family members, colleagues and acquaintances can all work as private money lenders.

It’s not always a good idea to mix money with friends and family—especially if this is a first time investment or you’re in a pinch financially. Many times it is best to work with someone where it is strictly business and in that case a hard money private lender is the best bet.

BEING SUCCESSFUL WITH HARD MONEY

Using hard money is a great way to get ahead in the world of real estate investments. Here are some tips to help you along the way.

Not all hard money lenders will require the same amount of money down—and some may not require any at all. However, it is always a good idea to have saved some money first. Even if lender doesn’t require a large amount down, you’ll save money in the long run if you are able to invest your own money in the project. Hard money lenders like to see that their clients have money in the bank. Most lenders can fund the majority of the cost that includes both the sale price and the renovation cost. Generally, lenders will finance about 70% of the total purchase price.

Be prepared for higher interest rates than a conventional loan. For each investment deal, hard money lenders evaluate their risks. You should walk into the deal knowing you will be looking at anywhere form 7.99% to upwards of 16% depending on your lender. Typically, hard money loans fall into about 10% interest rates. Points can range from 3 to 6.

Understand exactly how much you will need. Make sure you walk in a lender’s office with a budget, appraisals and a business plan. A legit lender will not want to do business with someone off the street that has an “idea” and thinks it will cost “about this much.” They want solid numbers and to be confident that you know what you are doing.

Make sure that you are working with a transparent lender. Your hard money lender should provide detailed documentation that outlines the entire process you will be going through. Most lenders will give you a free consultation before you apply to make sure that you are confident in them. Be aware that there are many so-called lenders that aren’t truly lenders—they are brokers trying to party another’s investment. It is beneficial to do a little research on your lender before signing anything. Make sure they are established and you are able to see some of their success stories. There are also lenders out there that prey on the vulnerable with bad credit. Many people with poor credit will get themselves involved with anyone saying they will approve a loan for them. If a hard money lender tells you they will finance you at 6% and 2 points with your 510 credit score—they are not legit. And, even if they are, make sure you read the fine print. Because, if it is too good to be true—then, it most likely is not true.

Before signing your name of the dotted line make sure all your t’s are crossed and your i’s are dotted.

An honest lender will not pressure you. In fact, they will take the time to make sure what is at stake and that you have all the necessary information. Working with a hard money lender can aid in your success, but it is imperative that you find one you trust.

5 THINGS TO KNOW ABOUT NEW CONSTRUCTION LOANS

Construction loans have changed in the past few years. Years ago most of these loans came from traditional lenders. It is common that traditional lenders decision on construction loans waver with the market. So where do you go for a new construction loan?

In today’s market new construction loans may be harder to get. Generally, banks and credit unions tend to shy away from these loans, hard money lenders are still willing to work with these projects if they fit their qualifications. New construction hard money loans are short-term loans used to finance the construction of a property.

There are certain things investors should know when searching for hard money loans:

1. There may be a down payment: Find out how much of a down payment will be required. For example, on a construction-to-permanent loan the borrower can most likely work with the hard money lender for the construction of the property. Typically, the lender will require a 20% non-refundable deposit. This deposit can be rolled into the takeout loan.

2. Rates and Fees: In the past investors were hesitant to work with a traditional lender who wanted 10% to 12% interest and 3 to 4 points. Because traditional lenders don’t regularly work with construction loans, builders and investors alike will have to get used to the idea of higher interest rates. You will pay a higher interest rate using hard money. Hard money lenders are taking huge risks with new construction loans. Builders need to be prepared for interest rates ranging from 10% to 15% and 2 to 4 points on the loan. There is no getting around that.

3. Location: Location is key when it comes to new construction loan approval. A hard money lender absolutely must feel comfortable with the geographic location of the project. They will only underwrite a loan if they are confident of the location of the project.

4. Lot: The lot can be included in the construction loan. Find out if the lender is comfortable including the lot cost. In a perfect situation, the lot would be free and clear. However, many times that is not the case. Some lenders will loan as much as 60%-70% LTV of the appraised value and potentially allow the lot cost to roll into the loan.

5. Be Prepared: Investors and builders alike need to be prepared to have all necessary information for the lender. Lenders want an experienced builder with a minimum credit score of 600. They will also want a budget and all supported financials.

Understandably, hard money lenders are cautious with new construction loans, but they are willing to fund builders if they are able to meet the set requirements.

WHY USE HARD MONEY?

Why would anyone need a hard money loan and what is the difference between a hard money loan and a traditional loan?

Hard money lenders take a different approach than traditional lenders. While traditional lenders base approval upon a borrower’s credit score and income—a hard money lender basis their approval upon the value of the proposed property. The hard money lender’s collateral is in the property. In any case of non-repayment the hard money lender will simply repossess the property and sell it to gain their return. There is risk involved for these lenders. Not only will they work with bad credit; they are also working on deals that could easily flop. Take for example a fix and flip loan: an investor finds a property that he wants to rehab. He finds a great property that he believes he can make a 150% profit. He has a great business plan and the house is in a very sought after neighborhood. The hard money lender approves his loan. All is good until an unforeseen event occurs and the investor doesn’t complete the renovations. Now, the loan terms have run out and his balloon payment is due—he disappears.

Because of the larger risk that hard money lenders are taking and because of the shorter terms of the loans (we will get into that in a minute) they charge a higher interest rate than a conventional mortgage. Hard money loans tend to run anywhere from 7.5% to 16%, depending on the lender.

What is beneficial about hard money loans? A lot. We have already discussed bad credit. Flexibility. Hard money agreements are much more flexible than traditional loan agreements. Hard money lenders do not use a standard underwriting process. Not using this standard they are able to look at loans on an individual basis versus just looking at numbers as large corporation do. Depending on the situation, it may be easy to change repayment plans. Need money quick? Another benefit to hard money. Unlike conventional loans that can take up to 90 days—30 if you are lucky—borrowers can be approved within minutes and fully funded within ten days. This is helpful to investors that are competing with cash buyers. A seller will always take a cash deal over waiting up to 90 days for their money. In fact, sellers enjoy working with hard money because they know the deal is going to go through—there aren’t going to be any hang-ups that can delay closing.

Is a hard money loan right for you?

That’s simple. Are you looking for a home to live in for years to come? Do you have good credit and a solid income? If the answer is yes then a hard money loan isn’t right for you. Are you in need of rebuilding your credit, but want to purchase a home? Are you an investor in need of financing to fix and flip a property? Are you a business owner that has a few dings on your credit, but want to expand your business? If you answered yes to any of these—then, the answer is, a hard money loan is for you.

WHAT YOU NEED TO KNOW TO FIND A HARD MONEY LENDER

Hard money lenders are private investors who will lend money and use the property as collateral. Typically, these loans are approved for real estate investors.

Real estate investors are constantly looking for a great real estate investment. While they are searching for these investments they are also looking for financing. Real estate investors usually have more than one project going; and often they have multiple loans out. Where are they getting all this financing? Certainly not from a traditional lender. Banks and credit unions are not comfortable with a lender whom already has more than a couple of loans out at a time regardless of their credit score and income. Unless these investors have money on the side they must find financing to stay in business. Hard money lenders are typically where real estate investors go for financing. Hard money loans can be used to buy rental properties, fix and flips and commercial real estate.

Hard money loans are short-term loans—typically two to five years—that are secured 100% by the real estate. Instead of the loans being backed by the credit of the borrower they are backed by the value of the investment property. There are a few situations that having a hard money lender on hand will be beneficial. Turnaround situations—this is when a property is purchased and needs to be turned around for a profit in a very short amount of time. Often a real estate investor only needs financing for a short period of time. For example, an investor purchasing a fix and flip only needs financing while the house is being rehabbed. Once, the house is sold the investor no longer needs any financing. Instead, they take the money from the sale, repay the hard money lender and the rest is their profit. Another popular reason to seek hard money is borrowers who have poor credit. The substantial equity in the property will make up for the poor credit rating.

How can a borrower find a hard money lender?

It is very easy to find a hard money lender. They aren’t hiding in dark alleys or on a “I know a guy who knows a guy” situation. It couldn’t be easier to find a lender. Take your typing fingers to the internet and search your city and hard money lender. There are several other ways to find a lender such as attending certain real estate functions and asking around. If you are looking for more information on local hard money lenders and how they can help, contact us at level4funding.com.

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