Qualifying Hard Money Lenders
There would be instances when a real estate property owner or investor would find himself hard pressed for cash and time to finance his investment. As opposed to going to the banks to apply for a much needed loan, some would-be borrowers go to a hard money lender. For whatever reasons real estate investors can choose to go to hard money lenders for a loan. One big attraction to these lenders is how quickly you will be able to get the loan.
Requirements for Hard Money Loans
Hard money loans are considered as mortgage loan since the lender will be using a real estate asset as the collateral for the loan. The amount of money the borrower will be able to get is primarily based on the value of the property itself and not on the credit standing of the borrower. However, it is wise to take note that hard money loans are short term loans and are usually expensive compared to bank financing. The interest rates for this type of funding varies – ranging from 10-18% with additional charges called points. It is often that hard money lenders charge 3-8 points (points are an percentage of the loaned amount. For example: $100,000 loan charged 3 points or 3% would be $3,000). Although the higher interest rates would seem to be scary for first time borrowers, seasoned investors are less daunted by it. They would simply reason out that the benefits of being able to get the much needed financing quickly outweighs the higher cost it entails.
Qualifying the Lender
Not all lenders are created equally. Also, not all lenders lend the same. Unlike traditional bank financing that have similar interest rates, similar costs and similar qualification methods hard money lenders are quite different. Think of it this way: Lender 1 is your neighbour and Lender 2 is an unfamiliar person from a real estate investment club you attend. They will both lend differently and will charge you different interest rates while also having different lending requirements.
Get to know the Lender
The absolute best thing you can do is to determine how the lender will do business. A ten-minute conversation can give you great insight into how they will lend to you and what their requirements would be.
Questions to Ask
Here are a series of questions that will help you understand what the lenders will consider. However, before you go running and calling the lenders keep in mind most lenders are not asked this many question so they may But, these questions will also show that you know what you are doing better than most the lenders may speak with.
- What are their points?
- Can points be charged at the end of a loan?
- What interest rate do they charge?
- What is their LTV?
- Will they lend the LTV upon the value or purchase?
- Will they fund repairs?
- Can you pull cash out of a loan?
- Do they lend in residential financing?
- Do they lend in commercial real estate?
- Do they have a pre-payment penalty?
- Do they offer a Proof-of-Funds?
- Do they check credit?
- Do they look at the property more than you?
- Do they have an application fee?
Hard money lenders are widely used in real estate but when you use them think: “Are they good enough to work with me?” This will help you understand the purpose of qualifying the lender and find the best funding for you and your business.
How to Qualify Private Lenders
Private lenders can be a great way to start your “fix and flip” real estate business. Typically, a private money loan is meant for short term lending purposes and then the property is either sold or refinanced. Private money lenders base their loan on the equity of the property and not the purchasers credit or income credentials. Private money lenders are typically a private individual or group, not an institution. When speaking with private money lenders it’s important to qualify them to find out what you can expect from them and what they expect from you. You’ll want to know the terms, the conditions and just how much they are going to be involved in your project. They will also have their own qualification process of you and your property but for now we will focus on the information you will want to obtain from your private lenders.
First of all, you will want to know the terms of the loan you will be getting from your private lender. Typically, the interest rate will be quite a bit higher than if you were to go to a conventional bank, don’t panic, as long as you run your numbers correctly and there is a profit at the end of things, this is a win-win for everyone until you can make enough profits to buy the property with your own capital. Also, make sure you ask if there will be any points charged in this transaction. It is very common for a private lender to ask for 2-3 points when the property is sold. These points are equal to 2-3% of the purchase price. This might seem like a lot but it’s all about running the correct numbers. Keep in mind that once you prove yourself to your private money lender, they may be willing to negotiate the terms of your next “flip” because they now trust that you will be able to renovate and sell the property and they want to keep you as a customer. The next thing you will want to know about the terms of your loan is how much the private lender is willing to lend to you. For example, they may be willing to give you 90% of the purchase price but you will need to come up with the final 10% as well as the rehab costs. In other instances, you might find a private money lender that is willing to give you the rehab costs for a higher interest rate and you will approach another source for the majority of the purchase price. You will also want to discuss if and when any payments will be due during this process. Keep in mind, because this is a private individual or group, they get to set the terms. Some will require monthly payments and others will not require a payment until a certain number of months have passed. It is imperative that you understand exactly what terms your private lender is giving to you, so that you can make sure you are running your numbers correctly and ensure you will make a profit.
Another thing you want to find out from your private money lender is what will happen if you go past the agreed upon number of months they are lending. In some cases, the interest rate will go up. Other times, payments with penalties included will begin. In the rare occasion that the property is not sold within the allotted time you need to know what your private lender is going to require. This is a rare situation but it’s better to have this conversation up front and know what needs to be done so that there are no surprises for either party if the situation arises.
The last thing that you want to talk about with your private money lender is how much they plan on being involved in your project. Some private money lenders want to have a say in the plans, the colors and the selling of the property. They feel because their money is involved they have a right to some of the decisions. Then there are other private money lenders that will quietly let you run the project unless they see a huge red flag and need to step in with their opinions. Either way, you want to prepare yourself for which type of “partner” you are teaming up with so that you will not be insulted if your private money lender wants to have a say in your project.
At the end of the day, a private money lender is an excellent way to get your foot in the door as a “fix and flip” real estate investor if you don’t have the capital yourself. Getting creative about using other people’s money to help you get started is a great option to begin this process. There are a lot people out there with money that want to make their money grow and you want to make your new “fix and flip” real estate business grow. By using their money to start your business, it’s a win-win for both of you. Just make sure you communicate clearly the terms, the conditions and what expectations you have of each other so that the relationship can continue through many more projects.
How To Find Private Lenders
A great way to leverage your funds in a deal is to work with some private lenders. I would define a private lender as a private individual or company that loans money, for the purpose of funding real estate transactions. The lenders will usually secure their loan to you with the note on the property or some other kind of collateral from you. They are more flexible than hard money lenders and usually less expensive. There are several ways you can find these lenders.
- Online Searches: Use your favorite search engine like Google, Yahoo or Bing. Do a search for “private money lender, your city and state”, this should produce a list of places you can contact and qualify to see if they would be a good lender for you.
- Family or Friends: You would be amazed how many of your family and friends want to get into real estate investing and how much they might have to lend you. One thing to remember, always be cautious which family and friend you want to work with. Make sure they have some business savvy, also make sure they can afford to lose the money they invest into your deal, not that you are going to lose that money but if something were to happen then the loss would not ruin them or you.
- Real Estate Investment Clubs: This is one of my favorite places to find good lenders. Attend your local real estate investment club meeting. At this meeting you will usually run into private lenders and that face-to-face meeting will help you establish a working relationship with these guys.
- www.meetup.com on this site, get to the search button, type in “real estate investment club”, then select your city and distance you want to search. Then you will get results of club in or around your area. Click on each club individual, read about who they are and contact the organizer and get registered to go to their next meeting.
- www.creoline.com from this site, search your area and a list of clubs will be listed out. Contact the organizer and get registered to attend their next meeting.
- Networking Sites: The following sites will allow you to network with people and/or specific groups within these sites that will give you good leads to the lenders.
3 Reasons to Use Hard Money Lenders
Hard money lenders are private people or companies that use their own money or lines of credit to finance real estate. These lenders are often familiar with real estate. They have often built lending companies as well as purchased, sold and exchanged many forms of real estate throughout their business life. Because of a hard money lenders extended knowledge their prices, interest and other costs are set. Their interest rates usually run about 10-18% with additional costs (called points) around 3-8% of the loan amount being lent to you. These large costs may deter first time and new investors from using hard money lenders for their real estate investing businesses. However, here are three large reasons you should consider using hard money financing in your own real estate investing businesses:
You have likely heard “cash is king”. In no other business is this truer than in real estate.
Think: if you were selling a house and you received two offers. One was cash and the other was traditional financing. With all other items being equal you would be more likely to accept the cash offer. Cash gives strength and power to your offers. Hard money financing is often considered as “cash” financing and gives you the same strength, power and value as actual cash.
One of the similarities and benefits of cash and hard money financing is the speed.
If you were at a grocery store to purchase a candy bar and purchased the treat with cash it would only take you minutes to purchase the candy. Similarly, real estate purchased with cash or hard money financing can be completed very quickly. Unlike the candy bar real estate purchases have a need to clear title. However, after a cleared title real estate transactions can be completed in days. This speed can also give large strength to your offers.
Hard money lenders do not have the same lending requirements as a bank. As you may know or have experienced: banks often require down payments, good credit scores, years on a job and sizable bank statements. This is not likely the case for hard money lenders; instead, their evaluations are usually on the property and the equity you are purchasing as a part of their property review rather than on you.
Easy qualifying allows more investors like you and I to purchase.
Reading these easy steps, you can see the value of the financing offered by hard money lenders. To add to the benefits of these types of lenders if you know their costs you can deduct the costs from your offer formulas so that there is little to no change to the profits you could make in real estate transactions. Consider using hard money lenders to finance your next real estate transactions.
Refinancing Your investment Property
The major difference between refinancing your primary residence and an investment or rental property, is that in addition to the standard paperwork, a lender usually requires at least six months’ worth of mortgage payments (as liquid assets) and a higher loan-to-value ratio for mortgages on investment properties.
What could refinancing do for profitability or return on investment (ROI)?
- If you need to get cash out of the property to purchase other investments.
- If you want to benefit from a drop in interest rates.
- If you plan to move out of your current location and wish to rent the property and/or the loan is due.
- If you want to maximize your (ROI) by lowering your monthly mortgage payment and increasing your rental income.
If you have ample equity, meet borrower requirements, and will benefit from a drop in interest rate, there are just a few more things to consider before you move forward with refinancing.
- LTV Requirements. LTV stands for loan to value ratio, which means exactly what it sounds like. The higher the percentage, the closer your loan amount is to the appraised value of your property. Of course, the higher that percentage, the less equity you have built up in your property.
- You need to have equity in your property to refinance it – plan on at least 20%. Realizing that the more equity you have, the better position you’ll be in to qualify and reap the benefits of a new loan.
- Additional Debt and Loan Eligibility. If you have long term goals of purchasing more rental properties, be mindful that taking on additional debt could have an effect on your eligibility for future loans.
- Mortgage Rates: Lenders consider investment properties riskier than primary residences. Mortgage rates for investment properties usually run about 1 percentage point above owner-occupied residential mortgages.
- NOTE: Lenders will typically not refinance a home that is currently listed for sale.
Even though it is slightly more difficult to refinance the mortgage on your investment or rental property than it is to refinance the mortgage on your primary residence, depending on your current interest rate and loan terms it may be worth the added “hassle” in the long run. Even a small decrease in interest rates or a refinance to a shorter loan term can save you thousands or more over the life of your mortgage loan. If you think it will be beneficial to refinance, reach out to a lender, compare rates available on investment or rental property refinances – then calculate the savings before you move forward with the refinancing on your investment property.
Self-Directing your IRA – FAQs
An IRA is merely a savings plan for the retired. The plan allows people who have not yet retired to invest a certain fraction of their retirement package without paying tax on the invested amount. This condition of an IRA is valid either prior to retirement or shortly after retirement. IRA stands for Individual Retirement Account. A Self-Directed IRA is unique because it has more investment options than any other type of IRA that is available on the financial market. Here are some important frequently asked questions related to the Self-Directed IRA.
What are some of the most notable benefits of a Self-Directed IRA? When you have an IRA, you will be entitled to tax deductions, asset planning and tax free profits. But, a Self-Directed IRA enables you to invest in various alternative assets, like real estate. The investment options in an IRA that is self-directed are more diverse than those which are associated with a standard IRA.
Is a Self-Directed IRA common? Self-Directed IRAs have been around since the early 1970s. However, they’ve received little attention because the custodian financial institutions do not usually allow alternative investment options that come with the self-directed plan.
How do self-directed investments work? There is a very slim difference between investing in a normal IRA and a self-directed one, other than the fact that you’re able to invest your retirement funds in other alternative assets if you so choose. The basic steps that are followed when investing in a normal IRA also apply to a Self-Directed IRA.
Disclaimer: The Company introduces general information and education concepts about self-directed retirement accounts (such as 401(k) and IRA accounts). Like any investment, there is risk in using retirement funds for investing in real estate assets. It is possible to lose a portion or all of an investment in real estate – including those purchased with retirement funds. Please review IRS Publication 3125 regarding the use of retirement funds for alternative investments. The document can be found at: http://www.irs.gov/pub/irs-pdf/p3125.pdf. Every individual is different, with unique circumstances. We do not offer tax, accounting, financial or legal advice. Prior to acting upon this information, you may consult your own accounting, legal and financial advisors to evaluate the risks, consequences and suitability of that transaction. The Company is not a retirement account custodian, trustee, or securities dealer.