Hard Money Lending And Self-Directed IRAs

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Hard money lending is quite a complex financial construction. However, it is also one that can greatly benefit real estate investors. This is due to a variety of reasons, although one of the key ones is the speed with which these loans can be arranged.

Using a Self-Directed IRA to Build Wealth

Meanwhile, another important aspect of hard money lending is how they benefit those who provide the money. Indeed, it is becoming increasingly common for people to use a self-directed IRA to build their wealth through the provision of hard money loans.

Because most financial institutions continue to require solid credit scores and spend weeks reviewing financial statements, tax returns and business plans, there is a growing need for quick financing for many individuals, small business and investors, especially real estate developers and builders for their real estate projects.

Benefit of Diversification

It is important to understand, however, that only those who have a very high risk tolerance should even consider making this type of investment. On the other hand, if you have that tolerance, then there are some considerable benefits to providing real estate investors with hard money loans. One of the key benefits is the diversification of your investment portfolio.

Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Benefits of Hard Money Lending for Both Lender and Borrower

Clearly, therefore, hard money lending, when done properly, is beneficial to both the lender, and the borrower. However, being practical is incredibly important. Those who request hard money loans tend to be the type of people who are denied bank loans and other forms of traditional funding. This means that they are high risk borrowers. Not just that, these loans are used for real estate purchases, and there is never any real security in real estate either. Finally, it is common for the borrowers to be newly created real estate enterprises that have not yet demonstrated their viability. It is a significant gamble to take, therefore, but also one that could truly pay off, if managed properly.

Essentially, when people first take out a hard money loan, they usually have little to no cash flow. Most of the time, no repayments are made for the first few months, or even more, of the agreement. Rather, the loan will mature at a later stage, requiring a balloon payment that pays the investors the value they expected. Naturally, they hope for growth on their investment and this is why a self-directed IRA could be so beneficial, as this provides a tax-protected environment.

Investing with a self-directed IRA isn’t much different than investing outside of an IRA. There are a few minor differences and some rules to be aware of.

Obviously, therefore, if an investor has a high risk tolerance for a long term investment, then this could be an ideal situation. It will not, however, work for someone who is approaching retirement, or who does not have a lot of money set aside.

Overall, what financial experts agree upon is that hard money loans have so many different avenues for all the different players involved in them. While some feel that these loans are incredibly risky, the reality is that they give people the chance to make investments, which in turn is good for the economy. At the same time, it enables those who have some money put aside, to see this grow, albeit over a longer period of time. While all financial constructions have risks associated with them, this seems to be the best solution of all.

Lenders Are Becoming More Creative As A Result Of Bank Tightening

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At present, everybody seems to be watching what the big banks are doing. This is mainly because the third quarter results will be unveiled by Wall Street today. This will tell us a lot about the national economy and whether the pledges made by Donald Trump are starting to pay off. However, by only watching the likes of Citigroup and JPMorgan, investors are missing the more creative lenders. What happens on Wall Street is important, but so is everything else that happens in New York.

Credit Growth in Private Capital

Credit growth, it seems, is no longer in the banking sector. While banks still play a role, the real growth is in private capital. And it is also here that we are seeing the greatest innovation. Consider, as an example, HPS Investment Partners.

HPS Investment Partners, LLC (“HPS”) is a leading global investment firm with a focus on non-investment grade credit. Established in 2007, HPS has approximately 100 investment professionals and over 200 total employees, and is headquartered in New York with ten additional offices globally.

HPS has some $39 billion in investment capital. It was once part of JPMorgan Asset Management but it is now completely independent. It is also no longer simply a hedge fund, having morphed into something else. They have announced, for instance, that they will now lend some $6.5 billion to other companies, offering private debt and specialty loans. The money comes through limited partners’ equity investments as well as the bank debt.

Banks Borrow from Investment Firms to Provide Loans

What this basically means is that big banks will borrow HPS money, and this money will be used to create corporate loans. This is a new construction, as corporate loans would, in the past, simply be supplied directly by banks.

That said, the HPS example is the biggest of its kind and it is hard to tell whether others are using similar constructions. This is due to the opacity of the private market as a whole. However, similar tools have now been created by BlueBay and Apollo. Then again, consultants such as Preqin have seen significant increases in levels of private debt as well.

2017 is certainly off to a strong start, specifically bolstered by the highly active direct lending segment in the US. Fund managers across strategies are seeing increased and sustained investor appetite for access to all parts of the market at this point in the credit cycle, when a hybrid of private debt strategies are poised to return strong results. Finally, with 284 private debt funds in market globally targeting more than $112bn, competition for investor allocations will remain fierce for the remainder of 2017.

The banks are keen to say that this is not healthy. However, financiers disagree. They believe that, since banks are so reluctant to provide loans nowadays, hard money lenders are a necessity to ensure the economy can grow. While certain borrowers are certainly high risk, they are also necessary to the economy.

Outlook on Private Loans

Private debt, clearly, is a demonstration of creativity in the entrepreneurial market. It is a main driver of economic growth. It also does not offer such a huge systemic threat, since the credit risk is shared across different banks rather than a singe one. Should the loan turn sour, the limited partners are those most affected. Furthermore, there is no chance of capital flight, because the loans are locked for up to seven years.

However, some are worried that the sector is growing too soon and too fast. The Great Recession of 2007 was caused by loans being provided too quickly, with too few securities. There is a risk that hard money lenders are going the same way, unless proper lessons have been learned.

House Flipping On The Rise Again, Thanks To Hard Money Lending

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When the financial crisis started in 2008, there were fewer people flipping houses. However, it seems that house flipping is now back with a vengeance. In 2016, it reached a 10 year high, in fact.

193,009 single family homes and condos were flipped – sold in an arms-length transfer for the second time within a 12-month period – in 2016, up 3.1 percent from 2015 to the highest level since 2006, when 276,067 single family homes and condos were flipped.

Rising Popularity of House Flipping

What flipping properties means is that investors need quick and smooth access to a lot of cash, even if that means paying a higher rate of interest as well. Because there is usually at least an 8% return on the loans provided to investors engaged in house flipping, hard money lenders find those loans attractive. Providing loans for house flipping has been an interesting industry for a very long time, but it is becoming more and more popular again, despite the fact that there are some significant risks attached to the loans.

Risks of Providing Loans to House Flipping Investors

Some of those risks include an inability of a developer to pay the loan back. Additionally, there is always a chance that there will be a decline in real estate prices. When that happens, it becomes impossible to sell the property for a profit, and charging rent will usually not be enough to cover the cost of the hard money loan.

Today, there are numerous lenders that focus specifically on the hard money industry. They have increased their transparency and their underwriting process is becoming more conservative as well. At the same time, this can be risky for investors, because these type of constructions have not yet been tested by the market.

That said, the loans remain very attractive, specifically because of their speed and ease of access. Yet, some experts say that it was house flippers who were behind the financial crash, rather than people who borrowed beyond their means.

The latest comes in a new NBER working paper arguing that it was wealthy or middle-class house-flipping speculators who blew up the bubble to cataclysmic proportions, and then wrecked local housing markets when they defaulted en masse.

Lessons Have Been Learned from the Previous Financial Crash

Yet, it seems that lessons have been learned. Bank mortgages are much less stable, because they have such a low loan-to-value (LTV) ratio, which is what is used as a risk assessment. On average, the LTV is around 55% for hard money loans, where it stands at between 75% and 80% for a bank mortgage. This means that, if a property does indeed lose its value, the lenders are still protected. It also means that flippers won’t walk away from the property, since nearly half of its value is their own money.

Why Hard Money Lending Works

Many also feel that hard money lending works because it is a form of partnership. The lender wants the borrowers to be successful and what they do. With a bank mortgage, the goal is simply to earn as much money as possible. Hence, if a problem does occur, a hard money lender is more likely to help find solutions. This is particularly true because the loan itself is usually only in place for 12 months.

Lenders do not believe that there is a possibility that another bubble burst will happen because of the short duration of each of these loans. At the same time, however, they do diversify their own portfolios as well. Mainly, they do this by investing in different geographical areas, and by focusing on a wide range of real estate properties, such as land, commercial properties, and residential properties.

Of course, this does mean that capital has to be raised from individuals as well. Hard money lenders are, more often than not, individuals or small groups of individuals. They need to be attracted to these systems by making it clear that their portfolio will instantly be diversified. Furthermore, there is a chance of an 11% return within 12 months, which is very significant. Meanwhile, for lenders, one of the greatest benefits is the speed at which the loan can be made available.

It is possible to score a hard money loan very quickly! This is one of the great benefits of choosing a hard money lender versus a traditional bank. The first step is to gather together all of your deal points and fill out an application. Within a 10-minute conversation with the lender, assuming you present the circumstances of your plan in a clear and organized fashion, they should be able to tell you whether or not it seems like a deal they are interested in funding.

Price to Pay for the Speed and Convenience of Hard Money Loans

Of course, there is a price to pay for this speed and convenience, one of which is the high interest rate. In fact, interest rates are often around 12%. Added to that are fees, charged as percentage points, which usually stand at a further 4%.

Yet, what makes these loans so attractive is the fact that there is a lot of money to be made in this industry. Choose the market right, and a return of 35% to 40% is possible. That said, returns tend to be quite lower, but certainly more than enough to repay the loan and the interest rates, and still have a significant profit at the end of it.

The big worry at the present time, however, is whether a collapse is looming or not. When we consider, however, the fact that many high net worth individuals are moving towards providing hard money loans rather than moving away from it, it seems that they feel quite confident about the market still continuing to be strong. Just like with every type of investment, you must consider each option on an individual level. Calculate the cost of fixing the property before flipping it, what the market in your geographical area is like, your ability to invest not just your money but also your time, and so on. It seems unlikely that the crash of 2008 is only just around the corner, or even that it will happen at all. However, that does not mean you can become complacent when investing in real estate either.

The Best Investments To Consider In 2019

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The year 2019 is now upon us and, for some people, it means they finally have a little bit of money to invest. Some people got a raise, others received a nice bonus, others came into some money in some other way. Whatever the source of the extra funds, it is very important to make sure that you invest that money in the right place, but where is that? Most of us know that there are thousands of things that you can invest in if you want to, but choosing the one that is right may seem to be very difficult.

This is a situation known as analysis paralysis, meaning you feel overwhelmed by the number of possibilities that are out there.

Occurs when an individual becomes so lost in the process of examining and evaluating various points of data that he or she is unable to make a decision with it. Analysis paralysis can occur with many decisions, including investment decisions such as buying or selling securities. The inaction it causes can easily lead to losses in a portfolio or missed chances at larger profits.

If you have extra cash and you want to put it to good use, you have to find the right investments. This does mean you have to analyze your options, but you do have to make a decision at some point. So what are the two options for you to consider in 2019?

Option 1 – Peer to Peer Lending

Peer to peer lending is becoming increasingly popular and there are now some well-established names in this field. One of them is the Lending Club, although platforms such as Prosper are equally interesting.

Lending Club is an online peer-to-peer (P2P) lending platform that takes the banker out of banking. Investors lend money directly to borrowers through the website, enabling both to benefit from the rate of interest established for each loan.

What companies like Lending Club and Prosper allow you to do, is loan money to people in the same way a bank does, but using your own money. In essence, you will become a hard money lender. The rate of return on doing so is really good, standing at around 6% on average. When you invest in peer to peer lending, what you are effectively doing is investing in other people’s ideas.

P2P lending is still a place to earn market-beating yields of up to 7%. But private investors are now competing against the world’s biggest financial institutions. So it’s important to have a good plan.

It is up to you to decide how much you want to lend in total, and how much you want to lend to each individual. For instance, it is not unheard of for people to only lend $25 to each person they support. This means the risk is relatively small.

Naturally, financial institutions have been worried about peer to peer lending for some time. That being said, a lot of financial advisors are now starting to see that the system makes sense, particularly as an investment strategy. It is very easy to become a peer to peer lender and the system is relatively safe. Add to this a rate of return of between 5% and 7%, and the fact that you can start with just $1,000, and it quickly becomes clear why this is a good system.

Option 2 – Real Estate

Real estate is perhaps the most traditional form of investment of all. Most people would love to own an investment property, seeing quite a lot of money in it. However, being a landlord is hard work and not everybody is cut out for it. A lot of people try to invest in real estate, find it much harder than they had expected, and end up losing their investment.

That said, you can invest in real estate and not become a landlord. This is possible in a number of different ways. One is to become a hard money lender once again, and work with fix and flippers who do the hard work for you. Another is to purchase real estate notes instead of entire pieces of real estate. The latter is a very interesting proposition for those who want to invest their own money. Essentially, it means that you lend money to an investor who manages the properties, and who pays you interest or dividend in return. They do the hard work, you supply the money.

Naturally, real estate is risky and you never know whether you will truly get value for money. However, you can mitigate this risk by going through new types of channels such as Fundrise.

Fundrise is the first service that makes the benefits of private market real estate investing available to you through one simple platform. By combining technology with new federal regulations, we bring the once-unattainable world of private investments directly to you.

Through Fundrise, people with relatively small amounts of money, from as little as $1,000 in fact, can invest in real estate in a very hands off manner. So hands off, in fact, that you don’t have to have any real knowledge about the property you have invested in. Once you start to invest with Fundrise, you don’t really have to do anything anymore. The rate of return isn’t fixed, but it is claimed to be between 8.76% and 12.42%, and they have been consistent in this for five years running. That is a significant return that you could take advantage of.

Even with Fundrise, there are risks involved. One of the key risks is that it is a relatively new company, which means their data may not yet be representative of the truth. Furthermore, you give your money and allow someone else to make the important investment decisions. For some, this is a benefit because it means they will never fall victim to analysis paralysis, but others are concerned that they have no control at all.

Whichever option you choose, you will effectively become a hard money lender. But what sets you apart is that you won’t be a lender that has millions to spend. You can do this with relatively small amounts of money.

Getting a Hard Money Loan for Flipping Houses

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So, you want to get into flipping houses? Perhaps you have some extra cash, or you’re just handy at fixing things up. It’s hard to know where to begin, but one thing you will need is some cash.

Remember that it can take more money to flip a house than buying a house for your own residence, mostly because you’ll have to do more work in order to make it an attractive prospect on the market.

Doing your research on your specific location is important too.

It’s harder to flip homes in certain states, but if you’re in states such as Tennessee, Pennsylvania or New Jersey, you could be making up to 140% return on investment for your hard work.

Plus, some states such as Washington have a Usury Law that sets guidelines for all interest charges, including home loans.

If you don’t have the spare cash to buy but have the technical know-how and the location in your favor, then you’re probably wondering where you can get the extra cash.

Most traditional lenders won’t lend you the money for house flipping, and those who do will likely want to see that you have the experience, for example, a house that you have flipped before. So, what do you do if this is all new and the bank won’t give you a loan?

Get a hard money loan.

But What’s that?

A hard money loan isn’t the same as a traditional loan or mortgage, let’s take you through what this is.

What is a Hard Money Loan?

It’s unclear where the name flipping houses comes from – whether it’s because the terms are “harder,” or the loans are available for “hard to finance” properties – hard money in some form has been around longer than most banks.

With these loans, private investors put up the money for houses that wouldn’t normally be financed by conventional mortgage providers. The collateral, in this case, is your home – a hard asset that they can collect on if things go wrong.

This may seem terrifying if you don’t know what you’re doing, but if it works outright, it can work out massively in your favor.

Know Your Loan Terms

The terms of a hard money loan are quite different from the terms of a normal home loan.

Usually, hard money loans are given for a length of a year or less, and their interest rates will be higher – around 12 percent to 18 percent, plus two to five points. Each point is usually worth 1% of the loan value, so if you borrowed $210,000 and the lender was charging two points, you’d pay $4,200.

With a conventional home loan, you pay these points at closing, but in a hard money loan, you often don’t have to pay points until the house sells.

Remember, a hard money lender is on your side. They want you to succeed so they can build a long-term relationship with you. In a hard money loan, the lender also bases the amount that you can borrow on the after-renovation value of the home, known as the ABV. This gives you greater flexibility when taking out the loan.

If the house price is currently $90,000 but the ABV is much higher, you may be able to take out the loan and cover costs such as lender fees, closing costs and selling with very little out of your own pocket.

This is how people who don’t have bags of extra cash can still manage to flip so well. Flipping can be very profitable, with the average profit in 2017 coming in at $68,143 per home. Even at just one home a year, that’s pretty comfortable living.

Tips for First-time Flipping Houses

When dipping a toe into the pool of real estate investment, it helps to be prepared. If you need to get a hard money loan, you can build the trust of potential investors by following a couple of steps:

  1. Begin networking in real estate.

It’s an industry where connections are vital. Many real estate investors often work on both sides – they also fix up and flip properties and look for investments where other people are doing the same.

New connections can provide a wealth of knowledge and may even end up being your hard money lenders.

You can join real estate associations in your area educate yourself before you decide to jump straight into the unknown and buying a property to fix up.

Your network will serve you in the long run – you’ll find out about areas where properties are selling well, discover hints and tips for staging a house, and may even make some contractor contacts to help you during the fix-up.

  1. Make a Business Plan

You need to do a thorough analysis of the property that you’re going to buy to assess if it has real value as a flip.

No one is suggesting a 30-page booklet here, but if you have laid out the basics, then hard money lenders will be much more inclined to see yours as a bankable investment, and you will be backing yourself by proving with the right information that this is a viable project.

Such details as the following are a good place to start:

  • Full address
  • Sale prices for the other homes in the neighborhood
  • Strategy and timelines for work
  • Scope of work required
  • A professional valuation of the property
  • Estimated value after renovation by a professional appraisal expert
  • Background details on anyone who is working on the project with you

Start Flipping Houses with a Hard Money Loan

If you’ve done your research and found your property, then nothing is stopping you from starting a new career or side hobby of fixing and flipping. And the best way to do this is with a hard money loan.

If you are confident that you can pay it back within the required period, you’ll find that the lack of red tape and the speed of getting the loan are highly conducive to getting your first project started.

Once you start looking, you’ll find hard loan money lenders all around, just be sure that you research them and find the one most suitable for your needs.

Why Hard Money Lending Is More Exciting Than The Blockchain

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Blockchain payment technologies like Fintech are hot topics right now. However, today’s economy is not yet based on cryptocurrencies and other such technologies. In fact, according to many experts, the real heavy economic lifting is currently done by nonbank lending. Over the past 30 years or so, there has been tremendous evolution and expansion in this particular niche, and even more so over the past decade. In fact, half of the residential mortgage market is now supported by nonbank lenders, something that is also causing some concern.

Non-bank failures could be quite costly to the government, but this issue has received very little attention in the housing-reform debate. The funding and operational structure of the non-bank mortgage sector remains a significant channel for systemic liquidity risk.

Be that as it may, this is a golden age for hard money lenders, private debt funds, and other non-traditional lending sources. In addition, they are aware of their limitations and risks and are considering methods of improvement. At the same time, they are focusing more strongly on both commercial real estate (CRE) projects and multifamily constructions. This is because there are two big problems with traditional banks: rising interest rates and increasing regulations.

The Growth of the Hard Money Lender

A quick look at financial news will rapidly reveal that all media eyes are on blockchain technology. However, while this has a significant impact, it is nowhere near the impact of the nonbanking sector on the economy. This is shown, for instance, in the volume of financial transactions performed by Fintech.

Transaction Value in the “FinTech” market amounts to US$4,256,048m in 2018. Transaction Value is expected to show an annual growth rate (CAGR 2018-2022) of 17.2% resulting in the total amount of US$8,018,084m in 2022.

They may be impressive figures but the non-banking sector has distributed around $100 billion in annual transactions. This was revealed by Pregin, a financial data firm.

The mortgage industry takes up by far the largest chunk of nonbank lending. Around 50% of residential mortgages were funded by non-traditional lenders in 2016, up from just 20% in 2007. For the VA and FHA insured mortgages, they funded around 75% in 2016. At least 80% of the volume of Ginnie Mae guaranteed mortgages were funded non-traditionally in 2017 as well.

Ginnie Mae (the Government National Mortgage Association) differs from Fannie Mae and Freddie Mac in that it operates as a government agency. It does not issue mortgage-backed securities and its guarantees are backed by the full faith and credit of the U.S. government.

Non-traditional Lenders Expand Their Reach as Small Banks Become Unable to Offer Mortgages

Clearly, non-traditional lenders are increasing their reach, providing services where traditional options are no longer available. Last year, 60% of the Ginnie Mae loan pools were serviced by non-banks, and 35% and 38% of the Freddie and Fannie Mae pools were also funded by them. It is also believed that this growth will only accelerate over the coming years due to the new capital rules put in place by federal regulators, which have affected all banking institutions.

Due to these rules, smaller banks in particular simply cannot offer mortgages anymore, as their portfolio is too large compared to their capital. That said, the risk this poses to small banks has been recognized. As a result, full implementation has so far been delayed while the rules are simplified.

Although some regulatory easing may therefore occur, banks had already started to move away from mortgages and because of the current uncertainty, they have continued to do so. The slack, inevitably, will be picked up by non-traditional lenders. After all, demand for projects will always continue to exist.

What Does Hard Money Mean?

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Investors use hard money loans for several different real estate transactions. often, it’s the quickest path to securing a loan.

The main advantages of Hard Money are:

Speed and flexibility

Sometimes this can outweigh the drawbacks of hard money loans. Hard money lending can get complicated quickly, so you need to realize what you are getting into before making decisions to invest with hard money.

Hard money loans are asset-based loans.

They are primarily used in real estate transactions. A borrower receives funds and the loan is secured by real property and used as collateral. The collateral reverts to the hard money lender if the borrower defaults. It is called “hard money” because borrowers are charged a higher price in both interest rates and orientation fees.

Paying a Hard Money Loan Back

Hard money loans are also harder to pay back compared to soft money loans A hard money loan is funded by private investors as opposed to conventional lenders such as banks or credit unions. The terms of hard money loans are usually short. They are typically 6 months to 3 years. Long-term hard money loans are best to be avoided due to the high interest.

Retipster.com states, “Unlike traditional bank loan criteria, the ability to obtain hard money financing isn’t determined based on the borrower’s creditworthiness.” Instead, hard money lenders use the value of the property itself in determining whether to loan the funds. The property may be one the borrower already owns and wishes to use as collateral or it may be property the borrower is acquiring.”

Hard money lenders are licensed differently than traditional financial institutions and are typically regulated at the state level.  Banks have certain non-negotiable criteria that borrowers must meet before issuing a loan. Hard money lenders operate with less regulatory scrutiny, allowing them to look at all merits of a loan.

For instance, hard money lenders are able to look past employment length, income history, and credit scores.   Hard money loans are often funded more quickly than traditional loans; in most cases, funds are ready in a week. Bank loans take at least 30-45 days.

 Circumstances Where Hard Money Loans are a Good Option

There are circumstances where hard money loans may be a good option for financing a transaction.

Situations Where Cash is Needed: Enticing a seller with a cash offer can be advantageous. This approach is ideal for investors looking to acquire bargain deals or distressed properties.

When Financing is Needed Immediately: Investors can move quickly to secure time-sensitive deals.   Closing with efficiency allows for the opportunity to close more deals in a shorter period of time. This is an invaluable asset to an investor.

Another situation is when Your Credit Isn’t Up To Par: Banks and credit unions are generally less willing to work with investors that have less than perfect credit.  Hard money loan lenders will make loans that traditional financing institutions would typically pass on.

The situations that are ideal for hard money loans are:

House Flipping: This is also referred to as “fix and flips”. Real property is owned just long enough to increase the value. The property is altered (rehabbed) to increase the value

Land Loans: Borrowers use funds to purchase land Typically real estate is built on the land.   Construction Loans: This is a short-term loan used to finance the construction of real estate investment property.

Bridge Loans: Bridge loans are used to sellers who want to buy a new home before selling an existing home but need the cash from the existing home. It’s just important to note that Hard money loans do not suit every investor or every type of deal.

When considering hard money loan as an option, it’s imperative to be armed with enough knowledge so that a decision is made with confidence. If you want to learn more about hard money lenders, browse our website.

Different Ways To Earn With Real Estate

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There are many different ways for someone to make money in real estate. It is for this reason that it is such a popular investment area. Lately, it has once again gained in popularity, but there are still a lot of people who don’t really know how to get into it and whether they have the finances to do it. The reality, however, is that it is possible to get into real estate investing without fantastic credit, million dollar assets, and a huge savings account. Rather, you could start a small escrow and get started straight away.

Escrow is a legal concept in which a financial instrument or an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction. The funds or assets are held by the escrow agent until it receives the appropriate instructions or until predetermined contractual obligations have been fulfilled. Money, securities, funds, and other assets can all be held in escrow.

There are a number of different ways to get into real estate investing as well.

1. Long Term Residential Rentals

The majority of people who invest in real estate do so by becoming a landlord. Because people will always need a roof over their head, investing in residential properties is a pretty safe bet. Play your cards right, and you can use this not just as an investment in your future, but even for present cash flow.

Many people invest in rental properties simply because of the cash flow – the extra money that is left after all the bills have been paid. The cash flow can provide ongoing, monthly income that is mostly passive, allowing you to spend your time building a business, traveling or reinvesting in more real estate.

However, getting into residential investments will generally mean that you have to save up for a deposit, unless you can find a reduced property and use the equity in the house as a deposit.

2. Lease Options

A second option is to lease, which is particularly good for those who don’t have a lot of money saved up or whose credit is less than amazing. Specifically, investors will lease to own.

A lease purchase is a written agreement between a landlord and tenant giving the tenant an option to purchase the property at some future point in time.

One of the greatest advantages is that, once you enter a lease to own contract, the existing owner cannot change his or her mind anymore. This also means that, if the housing market changes, you could get a significant discount on the property at the end of your lease term. If that happens, you can immediately sell the property at that point and make an interesting profit.

3. Fix and Flips

The next option is to fix and flip properties, which can be a very lucrative investment. However, don’t let the popularity of reality television shows fool you into thinking that this is easy. To properly fix and flip, you need a contractor and you must inspect each property. You then have to go through the five stages of fixing and flipping.

These steps are choosing the right neighborhood, checking housing market statistics, verifying the condition of the fix and flip properties, forecasting the overall budget, and calculating the potential profit.

Being successful in fixing and flipping means being very good at math. You have to calculate how much you will spend on the property and how much you will then need to sell it for in order to make a profit. The best investment properties are those that are selling for little money and that don’t require a lot of fixing, but they are also the hardest to find.

4. Contract Flipping Options

If you do not feel comfortable taking full responsibility for a fix and flip, you can venture into contract flipping instead.

Flipping a real estate contract involves transferring your interest in the contract (also known as assigning) to a third party.

In very simple terms, it means that you find a seller who is desperate to sell and put them in touch with a buyer who wants to make a purchase today. You then charge a fee for bringing these two together. Essentially, you won’t invest in actual real estate assets, but rather in contracts between those who want to own real assets.

5. Short Sales

The short sale option is quite tricky and difficult, but the potential for return is tremendous. In a short sale, someone who has defaulted on his or her mortgage hasn’t quite gone into foreclosure. Rather, the bank agrees that, instead of pursuing foreclosure, they will allow the house to be sold for less than what is still owed, which is generally much less than the actual value of the property. You need to have very strong negotiating skills to achieve this.

This type of sale is difficult and tricky, but it can bring in a huge return. This can happen when homeowners are behind on their mortgage, but the mortgage hasn’t actually gone into foreclosure yet. In order for a short sale to happen, everyone needs to agree because the amount will be less than what is still owed on the mortgage. You then negotiate a fair price that is acceptable to all parties.

6. Hard Money Lending

There are two ways to get into hard money lending: borrow money to purchase real estate or lend money to those wanting to get into real estate. Both options have their pros and cons, with the biggest disadvantage being the riskiness of the lending environment and the biggest advantage being the speed with which these loans are completed. Hard money lending is needed for loans on properties that banks will not touch, which include short sales, foreclosures, and fix and flip properties.

7. Commercial Real Estate

Getting into commercial real estate usually takes a great deal of money, not in the least because of the size of the properties, which means they are expensive. Not just that, they must often be fully repaired and renovated, after which they can either be rented or leased out, or they can be sold. Commercial real estate is a popular investment because there is a tremendous demand for it, particularly in certain up and coming areas. However, it is also incredibly risky due to the high expense involved in it.

Using a Hardmoney Lender To Reach Business Goals

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Getting into the home-flipping industry isn’t as easy to do as it may seem. In order to be able to flip a home, you first need to be able to buy it. Getting financing from a traditional lender often takes a lot of time, which can mean that the property sells before you are able to even get financing to buy it. Fortunately, there is another lending option available. Hard money loans are loans with quick approval and that can be obtained using the property you plan to buy as collateral. The following guide walks you through a few tips to use when you want to use hard money loans to get your flipping business off the ground.

You Need to Have an Estimate for the Flipping Costs

When you go to apply for a hard money loan, it’s best to have an estimate for what the actual cost of the flip will be. This shows the lender that you have a plan in mind, know what the costs will be and that it will be a profitable investment for them to make. Hard money loans are often riskier for lenders because they don’t require an overly high credit score or a huge down payment for loan approval.

Hard Money Lenders Often Need to See the Property

Before you can be approved for a hard money loan, it’s common for a lender to send an agent to look at the property in person. The agent determines if the investment is worth making by looking at the condition of the property, the plans you have for it and the real estate market as a whole in the area. If the property is located in a part of town where the properties sit for an extended period of time without selling, the lender may be leerier about approving your loan.

Hard Money Loans Can Get the Ball Rolling Quickly

When you flip a home, the sooner you can start working on the remodeling the better. Approval for a hard money loan can take as little as a few days, whereas approval for a traditional loan can take quite a few weeks or even months. Being able to get the money you need for the home as quickly as you can better your chances of actually being able to get it.

Hard Money Loans Designed to be Paid off Quickly

Typically, flippers get hard money loans because they know that they are going to repay them quickly. They plan to buy the home, flip it and make a huge profit. The money they get from the sale goes directly to pay off the loan that then any money left over serves as their profits. Knowing that you are paying a slightly higher interest rate than you would if you had a traditional loan can sometimes light a fire in you that makes you work harder and faster. This ensures that you are able to make as much profit as possible because you are paying the least amount in interest payments as you can.

Getting Future Loans Will be Easier

When you work with hard money lenders and prove that you will pay off the loan quickly, it makes it easier to get a loan with them in the future. Being able to show that you are responsible and diligent proves that you aren’t as much of a risk as some other borrowers and can make it much easier for you to get another loan in the future. This is ideal when flipping houses because you want to go through as little hassle as possible when it comes to getting financing for the loans as you can.

In 2018, home ownership dropped to 64.2%, meaning that home buying is at an all-time low. First time flippers make the mistake of buying a home without taking the neighborhood into consideration. This could be a huge problem according to property expert Egypt Sherrod. “I think it’s a mistake to buy and try to flip a property in a troubled neighborhood where every other home on the street is in disrepair,”.  It’s important to make sure not only the house, but the neighborhood is appealing to potential buyers in the current buyer’s market. To better your chances of approval of a hard loan, have detailed examples of what you plan to do to make the house unique and the positive aspects of the neighborhood and surrounding areas. Getting a hard money loan may be easier than a traditional loan, but proper preparation is key.

References:

U.S. Census Bureau, Current Population Survey/Housing Vacancy Survey, April 25, 2019. https://www.census.gov/housing/hvs/files/currenthvspress.pdf

Gray, Liz. Flipping a House? 5 Dos and Don’ts You Need to Know First. https://www.hgtv.com/shows/flipping-virgins/house-flipping-dos-donts-from-egypt-sherrod

How Important Is Private Lending In Commercial Real Estate?

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It was almost ten years ago when the global financial market crashed. Since then, a lot of things appear to have changed. Among those that have been affected the most is commercial real estate (CRE) lending, with loans now coming primarily from private lenders. Every quarter, people the world over continue to feel the effects of the Great Recession, despite it supposedly being behind us. And, as 2017 comes to an end, commercial borrowers continue to have to manage some significant financial complexities. Those include uncertain world affairs, a changing regulatory climate, and higher interest rates. What all of that means is that it remains difficult to secure commercial credit. Today’s lending standards are also tighter than they have ever been.

Well-established borrowers with long track records can still go to their banks and get financing. Regulations have made it more challenging, but if they have sufficient equity and well designed and capitalized projects, there are financing sources for the project.

However, financial investors are resourceful if nothing else. They are now in a unique position, and it is one that sees to have attracted private lenders to the commercial real estate market. The options offered by traditional banks simply aren’t realistic anymore, and this means investors have to look elsewhere. The result is that a range of new institutions have formed as well, including real estate developers, venture funds, insurers, and hard money lenders.

There are some key advantages to taking out a private money loan, not in the least that it provides a lot more room for movement in the CRE market. In addition, borrowers have found that a lot of these lenders are trustworthy and beneficial to them. The result is a significant impact on the CRE market as a whole, and it now looks as if private money is filling the gap left behind by the financial crash of 10 years ago.

How Is Private Money Helping?

It is quite obvious that there has been a significant increase in the number of private lenders that are becoming involved in the CRE market, and the existing statistics show this, too.

The silver lining for U.S. commercial properties came from the comparative strength of the U.S. economy and higher yields of U.S. assets. With global economies having slowed down in 2016, U.S. property markets remained a favorite destination for cross-border investors. While top-tier markets in gateway cities continued as major targets of investor activity, the higher yields and advancing economies of secondary and tertiary markets offered viable alternatives to investors looking for stronger returns.

That being said, it is very important to understand the impact of this on overall market activity. As such, the first key issue that is obvious, is that CRE investors and CRE developers continue to be heavily involved in the overall real estate market. However, they no longer have as much access to traditional lenders as they did in the past. This is due to traditional lenders choosing to be more cautious and also by new regulations, such as the Dodd-Frank Act.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a massive piece of financial reform legislation passed by the Obama administration in 2010 as a response to the financial crisis of 2008. The act established a number of new government agencies tasked with overseeing various components of the act and by extension various aspects of the banking system.

Of course, the Dodd-Frank Act is now in question again, as President Donald Trump has, so far unsuccessfully, attempted to repeal it in its entirety, to be replaced with the Financial CHOICE Act.

If we want strong economic growth and more freedom, we must empower Americans, not Washington bureaucrats.

However, much of the Dodd-Frank Act will stay in place and while the Financial CHOICE Act will be implemented, the reality is that investors will have to continue to look towards alternative lenders if they want to fund their CRE investment projects.

The Potential Pros and Cons of Private Lending in CRE

Lending always comes with risks. However, with private lenders, there is a different systemic risk associated with it. This was, in fact, a key lesson learned from the 2008 crash. Large lending organizations were classed as “too big to fail”, and this caused the Big Bank Bailout.

The Special Inspector General for TARP summary of the bailout says that the total commitment of government is $16.8 trillion dollars with the $4.6 trillion already paid out. Yes, it was trillions not billions and the banks are now larger and still too big to fail.

Private capital, if there is another burst of the real estate bubble, can quite easily absorb this. Only two players will be affected: the private lender and the investor. This is very different from an entire bank going under.

Yet, at the same time, there are some negative issues as well, one of those being that a lot of private investors are foreign investors. In fact, many of them come from China, as well as Canada and Europe. Clearly, the US market is seen as a safe market, but there will come a time when these investors start to see their own domestic market as safe again. This could have a significant impact on real estate investment trusts (REITs) further down the line, and the overall impact this could have on the market itself would be significant, albeit in theory.

What’s in Store for Private Money Lenders?

To date, the fact that the economy has strengthened has not resulted in more commercial credit becoming available from traditional lending sources. Hence, it is feasible that the last quarter of this year could see some real changes to what the lending environment looks like. There continue to be significant changes in financial regulations, and it is now also seen that interest rates are finally rising again. This means that, perhaps, traditional lenders will become friendlier to investors once again. Whatever happens, however, it is vital that the lessons learned from the financial crash and the benefits offered through private money since then continue to be at the foreground of their work.