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.
Hard Money Loans vs. Traditional Loans: Which is Better?
Flipping houses is a good business to be in. But, the nature of the game requires that you move swiftly when you find an undervalued property to buy. More often than not, you have to offer competitive terms—like a fast close—to win the deal and then renovate quickly to realize a good ROI. To do both, you’ve got to get the funds fast.
Unfortunately, less experienced investors sometimes make the mistake of seeking more traditional products, like a Fannie Mae Homestyle or the 203(k) loan. However, these loans are really made for individuals and families who want to buy a house and live in it while they fix it up. The 203(k) loans, in particular, aren’t suitable for investors because they can take months to close—even the so-called “fast track” renovation loans of $35k or less. A distressed homeowner typically needs to offload their home quickly, which is why they’re willing to sell them at a discount. Waiting months for a loan to fund and close on a home is not an option for you or the homeowner.
That’s why you’re better off getting a hard money lender to work with you so you can close on a home quickly and start the rehab shortly thereafter, with the right amount of funds. However, before you approach a hard money lender, you should think carefully about all of the advantages and disadvantages of this type of loan.
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||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.|
|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.|
So, if you’re planning on buying a major fixer-upper and flipping it as quickly as possible, getting a hard money loan is a no-brainer. It’s a great way to break into the real estate investing business for the very first time.
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 loan 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.
How to Get a Hard Money Loan as a New Investor
One snag you might hit is getting a lender to work with you if you’ve never invested in real estate. If a hard money lender asks for a real estate investor credibility kit that includes details about your investing experience and background or requires that you have a minimum number of renovated properties under your belt, your chances of getting a loan from a reputable lender can be slim. You might have some leverage, though, if you’ve got adequate liquid assets to use as collateral and a great investment property on your hands.
Even then, you should also try partnering with a more experienced investor on your first few deals to build capital and know-how. You’ll have a better chance of gaining the trust and getting a loan from a reputable lender when you’ve partnered with someone who’s successfully bought and rehabbed houses with healthy returns. Experience speaks volumes to hard money lenders—it’s your best collateral.
Aside from partnering with a more experienced real estate investor on your first few deals, it’s not a bad idea to have a decent FICO score as well. Though hard money lenders do not typically have strict guidelines regarding credit ratings—some ask for a FICO of only 550, for example—a score that’s at or above the typical FHA requirement of 620 implies less risk for the lender. If you’ve been responsible with other creditors in the past and have a good FICO score to show for it, hard money lenders are more likely to loan to you.
In short, there are a number of steps you can take to better your chances of getting a hard money loan when you’re new to real estate investing. But your first, and possibly best, step to securing the money you need is to improve your network.
Improve Your Network and Get the Money You Need
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.
Another major perk of becoming a HomeVestors®’ franchisee is that you gain access to UGVilleSM, the company’s proprietary software. This online portal connects you with local hard money lenders and shows you the terms and conditions for every hard money loan they offer. Being able to compare offers on the fly empowers you to make the best decision for your real estate investments.
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!
Each franchise office is independently owned and operated.
HomeVestors of America® is the nation’s only real estate investing franchise, providing wonderful business opportunities to real estate and investment professionals across the nation.