Judy and I have been friends for a long time. We went to the same school together, even ended up at the same company after graduation. But, from the moment I entered those double doors at the office, I knew I’d be quitting my corporate job for a startup in real estate investing as soon as I could—and, I did. That was almost fifteen years ago and I’ve never looked back. Judy, it seems, is finally ready to do the same.
Of course, there’s just one problem. Judy doesn’t have the funds to buy and renovate a property. It’s the same problem I had when I wanted to start flipping houses. But, over lunch last weekend, I assured her that there was a way she could get the money she needed. I told her that hard money loans for real estate investors are available to fund rehab projects for resale. Naturally, there are both advantages and disadvantages to using them. You might be thinking about using a hard money loan too. Here’s what you should know.
Advantages of Hard Money Loans For Real Estate Investors
There are several advantages to using hard money to purchase and renovate an investment property, which is why real estate investors rely on them. These differ from using traditional sources of financing, so it’s good to know what they are when you’re looking to fund a project.
- Fast Funding. The most notable benefit of using hard money is the time it takes to close on a deal and fund the rehab. With hard money, approval for the whole project can come from the lender within a few days. This is an especially big plus because it allows you to move quickly when you find a fixer-upper home for sale and leaves you some liquidity to continue renovations between repair draws.
- Approval for Major Fixers. Hard money lenders can help you buy an investment property that banks and credit unions might reject. That’s because these loans are awarded based on the after repair value of a property. So, if you’ve found a great deal on a single-family home or small multi-family building, a hard money lender may fund anywhere between 60 and 90% of the property’s value, up to full ARV. This percentage, called the loan-to-value ratio, varies between lenders, as do caps on loan amounts. But, these cap rates can be as high as several million dollars.
- Easy to Qualify. Even if you have poor credit, an employment gap, or a past foreclosure, it’s possible to still qualify for hard money. A hard money loan is secured by the property itself. Lenders closely examine the condition of the house, the repair list, and area comps when reviewing a loan application to determine eligibility. So, your creditworthiness will often matter less than the value of the property you’re trying to buy. This is why getting hard money can be relatively easy, especially when you’ve got experience finding good deals.
Disadvantages of Hard Money Loans
However, there are a few potential disadvantages associated with hard money loans. As a first-time borrower, it’s important to bear these in mind.
- High-Interest Rates. The interest rates on hard money are typically higher than those charged by conventional lenders. They can be as high as 20%, depending on the usury laws in your state. So, the repayment of these loans can be a financial drain if renovations aren’t completed on time or you have trouble selling after the rehab.
- High Out-of-Pocket Costs. Your out-of-pocket costs can be higher with hard money than when using conventional financing. Hard money loans come with an origination fee equaling two to 10% of the loan amount. Lenders do this to consolidate closing costs and streamline paperwork, and it typically has to be paid at the close of escrow. Your down payment will already be high since hard money lenders only loan on 60 to 90% of the property’s value. When you figure an origination fee into the mix, that equals a lot of personal cash to be out of pocket.
- Experience Often Required. You might find it difficult to get a hard money lender to loan to you as a new investor. Lenders often ask for details about your investing background, including how many properties you’ve bought and sold, before approving a loan. They may even ask for proof of your liquidity. If you can provide a real estate investor credibility kit that shows you know what you’re doing and that you can support yourself while doing it, you could be in the green. Otherwise, you might be out of luck.
As a workaround for a lack of experience, you can partner with a more experienced investor to grow your real estate portfolio and build some capital. Once hard money lenders see that you’ve done a few deals, they’re less likely to view you as a risk and more likely to give you a loan. Finding a partner you can trust can be a little tricky in the beginning, as can finding a reputable lender that will give you good terms. But, for every potential problem there is almost always a solution.
The Advantage of a Network of Experienced Colleagues
For me, the solutions to most of my problems came from my network. By surrounding myself with other investors more experienced than me, I got the best advice around and the best funding in town. My network helped me understand the ins-and-outs of using hard money and they steered me in the direction of reputable lenders who offered good terms. And, by becoming an independently owned and operated HomeVestors® franchisee, I got the network I needed faster than if had I tried to build one on my own. So fast, in fact, I had the confidence, and the cash, to buy my first property shortly after opening the doors of my business. That’s an advantage having an experienced network of colleagues, like my fellow HomeVestors®’ franchisees, gives you.
Curious about how to get a hard money loan for your first few deals? Let the network of HomeVestors® franchisees help. Contact the “We Buy Ugly Houses®” team today!
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