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6 Key Awareness Points Before Borrowing Private Money

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A lot of people are interested in taking out hard money loans, particularly if they want to purchase a fix and flip property or a rehab property, which banks won’t usually lend against. Indeed, there has been a significant increase in interest in these types of loans, which are usually taken out for around a year. Using such kind of private money is a great way to build a real estate investment portfolio, but it is important to research whether or not it is an appropriate solution for you. Below are 6 key factors to consider.

1. Make Sure You Choose the Right Lender

You should never simply pick the first lender you come across. Instead, there are questions to ask and considerations to make.

When you want a loan on a short term basis without much documentation then this is the best option. Private money lending is famous for the convenience it avails to persons who require financial funding but may fail to meet the threshold of banking institutions. Bearing in mind the minimal formalities, it brings about risk in dealing with such transactions as you also don’t want a fraudulent money lender to take advantage of you.

Make sure that your lender has experience in the type of deal you are interested in. If you want to fix and flip an industrial property, for instance, find a lender that has successfully invested in that before.

2. Understand Your Financial Role in the Flip

A lot of people like the idea of fixing and flipping because they think they can make a lot of profit. This is also due to television programs that make it appear like such an activity is a lot of fun. However, to do so successfully, you need a lot of expertise and experience and you have to be able to handle the risks involved as well.

3. Try to Help Build Communities by Investing

When you take out a private money loan, you actually invest in a neighborhood and that is a significant responsibility. The money will be used to improve a local area, boost business income, create jobs, and more. When you invest like this, you will see tangible improvements unlike what you would see when buying stocks and bonds. Your lender, therefore, should have a vested interest in the community as well.

4. Don’t Worry If You’re Not Rich

When people think about real estate investors, they often think of property tycoons like Wang Jianlin.

Wang Jianlin, a 1954 born Chinese businessman and philanthropist, serves as the chairman of the Dalian Wanda Group, which is also China’s largest real estate company, as well as the world’s largest movie theater operator. He owns 20% of the Spanish football club Atletico Madrid.

In reality, however, real estate investing is open to anybody, even if you need to get a hard money loan to fund your deals. Of course, you should never put all your eggs in one basket, so you have to find a balance between how much of your own money you can put in, and how much of a private money loan you will need to get.

5. Remember That You Will Have Tangible Assets

Getting a private loan means that you will invest in a material asset. The hard asset is the collateral for the loan, and it is also from this that it gets its name: ‘hard’ money lending. Owning property is a serious commitment that you have to be ready for and you must also understand that tangible assets are often slower to turn into a profit. But when they do, the profits can be substantial.

6. Have Realistic Expectations

Last but not least, it is important to understand that you will not go from being a first time investor to being the President of the United States. Even Donald Trump had to go through several steps before achieving that. When you start at the bottom, the road to the top is long but satisfying.

How Taking Out Hard Money Loans Can Make You Rich

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Have you ever walked past an abandoned or closed store or other commercial building and thought about its potential? Many people do, but they never take it any further because they don’t have the money to invest in it. If you really want to bring out that potential, you could consider borrowing the necessary money to make that investment. This is known as an investment loan.

Real estate investment loans, which offer financing for borrowers who intend to buy-and-sell or “flip” a property, are considered riskier than mortgages for owner-occupants.

Unfortunately, investment loans are very hard to qualify for. These loans have been created for those who believe they can make a profit out of something that currently isn’t profitable. In other words, it is a high risk loan and banks are not prepared to take huge risks, except in very exceptional circumstances. That said, investment loans do exist, particularly for commercial building purchases, equipment purchases, factory constructions, and acquisitions.

However, a down payment of at least 25% is often required, which is a significant sum of money, particularly on commercial real estate properties. Most investors simply do not have such amount of money available. Furthermore, they must be able to prove that they can afford the repayments of the loan not after they find tenants for their property, but right now.

How Much Can You Borrow with an Investment Loan

In rare circumstances, lenders will agree to finance up to 100% of the investment. However, in the majority of circumstances, they will only lend up to 70%. Hence, if a property is available for $500,000, it means that you would need to have $150,000 yourself to put towards the property. This is why investment loans are more popular with established real estate investors. Those who already have a solid rental business and simply want to grow their portfolio often find it reasonably easy to find that kind of money. However, this excludes those who want to get started as investors. They need to find lenders with higher loan to value offers, but tend to also charge much higher interest rates.

Meeting the Eligibility Requirements

A second problem with investment loans is meeting the eligibility requirements. Usually, a bank will have a due diligence process in place that you will have to go through. This means having your income and your credit scrutinized as well. In addition, each bank has its own requirements on top of that. It is important to understand that an investment loan is very different from a residential mortgage, even if you want to purchase a residential investment property.

The increased risk means the bank will charge higher interest for the loan, may require a higher downpayment, and will require higher lending standards before issuing the loan. A new housing investor can get around these higher prices by living in the home for a few years before renting it out (though your lender could possibly require you to renegotiate the loan if you move out too soon).

Furthermore, the application process is very different as well, and so with the repayment term. In fact, you can expect to have to pay back an investment loan for a duration of five to 15 years. This means that the duration is much shorter than the standard 30 year mortgage. It also means that the monthly payments are much higher. When you apply for these loans, the banks will make calculations based on your ability to repay the loan within this shorter period of time.

Because these loans are almost impossible to get for first time investors, you may feel as if real estate investments will never make you rich. However, there are alternatives to the investment loan. While they have their own pros and cons, they do offer you the opportunity to consider making an investment and bringing out that potential that you saw in the property in the first place. One such alternative is the hard money loan.

Using Hard Money Loans to Get Rich with Real Estate Investments

A hard money loan is a fantastic way for you to invest in real estate properties if you don’t meet the eligibility criteria for a traditional investment loan. Private lenders often focus on real estate investments. Effectively, they invest not in the property, but rather in you and your ability to make a profit out of that property. Hard money loans may provide you with the opportunity you need.

Hard money (also known as a rehab loan or bridge loan) is the term used for loans funded by private parties who want a safe and high return. Real estate investors use hard money when they are unable to or do not have time to obtain financing from more conventional sources. Typical banks won’t fund these properties because of condition or the fact that a full-time investor isn’t typically W2 employee.

Typically, those who apply for a hard money loan don’t meet certain traditional lending criteria. They may have poor credit, no credit, or otherwise not look perfect on paper. Meanwhile, the properties they are interested in don’t look perfect on paper either. However, a hard money loan is based on assets, and particularly on the value of this asset from the perspective of a business.

One of the greatest advantages of hard money loans is that it is possible to have the money funded in a matter of days. That means you don’t have to worry about missing out on an investment opportunity because the bank took too long to make a decision. Instead, you can put an offer in straightaway.

However, if you want to get rich using hard money loans, then it is vital that you focus on being profitable. You also need to demonstrate this to lenders, who need to have confidence about your ability to repay. This isn’t about how a loan goes through the underwriting process, as it is not a home mortgage. However, it is about your ability to take a property and turn it into something that is worth more and that brings the money in. Do also be aware of the fact that, if you so much as fall behind on a single payment, the lender can and most likely will repossess the property.

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.

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.

The Pros And Cons Of Taking Out A Hard Money Loan

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Hard money lending is quite a unique form of lending. It is generally used for real estate transactions, but goes outside of traditional mortgages and other such lenders. Usually, the money is provided by investors, which can be individuals or groups, who are looking at the feasibility of providing short term loans with relatively higher interest rates. If a traditional lender denies someone a loan, or if someone needs money fast, then hard money may be the best option out there.

Understanding Hard Money Loans

No matter what type of loan you take out, the lender will want to have proof that shows you can afford it. Generally, this means looking at your income and credit score. If you have a good history that shows you have repaid your debt, and you have a good debt to income ratio, then most lenders will approve you. However, determining this is a long and slow process, even if you have a fantastic income and perfect credit score. On the other hand, if you have a few negative marks, or a complex form of income, then things take even longer and you may even get declined.

A hard money lender looks at things differently. What matters to them is your collateral, which they will secure the loan against. This means that your repayment ability is a lot less important. Should you find yourself in financial difficulties, the lender will simply take your collateral and sell it on. Hence, it is the value of this collateral that is the determining factor, not your personal financial situation.

A loan of “last resort” or a short-term bridge loan. Hard money loans are backed by the value of the property, not by the credit worthiness of the borrower. Since the property itself is used as the only protection against default by the borrower, hard money loans have lower loan-to-value (LTV) ratios than traditional loans.

In most cases, a hard money loan is a short term loan, lasting no more than five years. They have very high interest rates, which is why most people wouldn’t want to have the loan for longer than absolutely necessary anyway.

Why Should You Consider a Hard Money Loan

A hard money loan is very costly, and that is its greatest disadvantage. However, there are a number of situations in which it can be very beneficial.

Hard money loans are right for both short-term investors and long-term investors. Specifically, hard money loans are used by Fix-and-Flippers, Buy-and-Hold Investors, and Portfolio Investors.

There are a number of key reasons as to why these types of investors would look to hard lending:

  1. Speed – Because the focus is on collateral rather than financial positions, a loan can be approved and closed very rapidly. Naturally, these lenders don’t want to repossess your property, but they have a lot less risk as they don’t have to verify your income. You build a relationship with a lender and the process is then incredibly quick.
  2. Flexibility – Hard money loans don’t go through regular underwriting processes, evaluating individuals instead. You have the possibility to change your methods of repayment, not in the least because you are likely to work with an individual, rather than a huge national bank that has stringent policies.
  3. Approval – Since these types of loans are secured against a piece of property, you can generally borrow as much as the value of your property. Negative pointers on your credit report, such as past foreclosures, are much less important. While lenders will usually view your credit, they won’t generally base their decision on that.
  4. Low LTV (Loan-to-Value) ratios. Usually, you can get an LTV of between 50% and 70%. While this means that you do need some assets, the ratio is much lower than what it would be on an investment property with a traditional lender. Again, this is because the lenders know they can get their investment back quite easily should you not pay back.

When Should You Consider a Hard Money Loan?

A hard money loan should only be taken out for short term loans because of their high interest rates, as stated. This is why they are so popular with fix and flip properties.

Hard money lenders will charge 2-5 points and 12-18 percent interest, although some hard money lenders will allow a smaller down payment and finance some repairs. The catch is hard money lenders like to work with experienced flippers and usually only offer their best loans to repeat customers.

With fix and flip investments, a property is purchased, fixed, and sold within no more than a year in most cases. The goal is simply to purchase a property and sell it for a profit in as short a time as possible. If the property isn’t sold, and investors decide to live there while waiting for the value to increase, they will generally look at a refinance option so as to get better value.

The Disadvantages of Hard Money Loans

While the hard money loan has some key benefits, it has some drawbacks as well. The biggest is that it is a very expensive form of lending, which means lenders must anticipate significant profits if they want to end up with profit. Furthermore, the way that properties are valued is also often different from traditional lenders.

The interest rates on hard money loans are incredibly high. This is why these loans should be considered if you are sure that you won’t be accepted anywhere else. There are numerous loans available for people with poor credit or complex income scenarios, and you may want to consider those first, even if they take longer to close. An FHA 203k loan could be an option, for instance.

An FHA 203k loan is a loan backed by the federal government and given to buyers who want to buy a damaged or older home and do repairs on it.

How to Find a Hard Money Loan

In order to be accepted for a hard money loan, you have to find an investor. This means you have to research who offers this type of money in your local area. Real estate investor groups and real estate agents are usually a good place to get those important connections. Make sure you speak to a number of different lenders before you decide to sign up.