When real estate investors use cash or equity to purchase properties, loans for rental property allow them to leverage their portfolios. The interest rates paid on these loans is less than the higher rates of return that these real estate investors can earn if their equity is working in new projects. This is one of the primary reasons that real estate investors take out such loans for rental property.
Another reason that investors use these loans is to buy out equity and replace it with debt is to end costly or troublesome real estate partnerships. For example, a real estate partnership whereby one partner is employing family members to manage the asset may be more costly to the bottom line as this enters a gray area where business and personal matters collide. In this case, the borrower used a loan to buy out the partner and this resulted in an annual cost base on the asset that was far less than before.
The interest rates on loans for rental property can range as low as 6%, to as high as 10%, depending on the various factors involved. Most loans against rental property portfolios require a minimum number of properties, or a minimum portfolio value. For example a real estate investor owns a portfolio of 10 rental properties with a value of $750,000. The properties were purchased with all cash, rehabbed, and then rented. The real estate investor obtains a cash out refinance loan against the portfolio of rental properties to leverage the equity in the portfolio. The investor then uses the funds to purchase additional investment properties.
Because rental properties in a portfolio may be located in different States, loans for rental property are often not available from traditional banking institutions. If these loans are available, real estate investors may not meet credit score requirements of bank loans due to past foreclosures. The most favorable loans of this type, may come from a non bank lender, also called a private money lender. Because the requirements of private money loans are far less than of that of a bank, qualifying for these loans is easier than obtaining a bank loan in some cases. (Here are some more reasons why borrowers may choose private money loans over bank loans). For more information on private money loans for rental property, fill out a short form on our website here.
When a real estate rehab project is starting to go sideways, never shut the door on your hard money lender. Maintaining strong, open communication with your hard money lender on a real estate project is your best chance of success. Particularly on a rehab project when unforeseen obstacles appear such as budget overruns or cash flow problems, don’t act like a frightened turtle and go hide in your shell. If you have a hard money lender on the project, give your lender a call and tell him or her what’s going on if trouble arises. A hard money lender may have experienced similar obstacles before and may have some creative solutions to overcome them.
An example is a real estate rehab that we provided a hard money loan on fairly recently. We did a final walk through prior to closing on the loan and the house had some crazy paint colors (e.g. pink, green, and orange), but it didn’t seem to need more than just some cosmetic remodeling. When the third loan payment was late and the property was still not listed for sale, we called the borrower to find out what was going on. He informed us that his partner had split town along with the funds to complete the rehab. Long story made short, the borrower simply did not have anymore money to finish this rehab project. All of the demolition had been completed, the trash had been hauled away, and the house was a clean slate on the interior ready for carpet, paint, cabinets, and fixtures.
With no money to complete the project, this borrower was up a fast moving river without a paddle. He said he was afraid to tell us that he was in trouble and was trying to come up with the money and solve the problem himself without getting us involved. But failing to communicate with your hard money lender in a bad situation like this is a big mistake. Once we knew the situation this borrower was in, we were able to provide some of our own resources, including contacts in our network, to help solve the problem. A real estate investor in our network reached out to the borrower because he saw the merits in the rehab project and decided to partner with him. Because this borrower told us that his deal had gone sideways, we were able to step in and lend our contacts which ended up saving the deal.
Never leave your hard money lender out of the loop of communication on a deal if things go sour. Your lender is similar to a partner on a real estate deal and needs to be communicated with if unforeseen obstacles come up. If everything is going smoothly on a rehab project, on schedule and on budget, then no news is good news. But sometimes serious problems begin to appear such as: running out of money on a rehab project, repairs go way out of scope, an environmental issue arises, a State, City, or County conflict rears its ugly head, etc. When serious problems arise in a real estate deal, a lot is at stake. Give your hard money lender a chance to provide advice, resources, contacts, or even additional capital if necessary, rather than lose the deal altogether.
Private money loans, or non bank loans, are in high demand in our tightly wrapped credit market. In the private money lending space, there are new technology driven trends that are being tried, tested, and of course, copied by others at break neck speed. In fact, the financial technology sector has grown in leaps and bounds in recent years, churning out startups such as Square, the money transfer startup ‘TransferWise,’ and so many others. Specifically in the area of private money loans, a couple of the most notable trends include:
1. Crowdfunding: This is a new trend whereby money is raised from a large number of individuals via the internet to invest in projects, businesses, or other ventures. Most commonly associated with sites such as Indiegogo and Kickstarter, the crowdfunding concept has gained huge steam and many copycats have followed suit. This concept has inevitably leaked into residential and commercial lending. However, the legality of crowdfunding on residential real estate is questionable given the new legislation under Dodd Frank and the Safe Act. Will these crowdfunding sites that lend on residential real estate be shut down due to non-compliance, or will they just operate under the radar? Either way, crowdfunding in real estate is a new trend that is yet to be fully tried and tested. Many companies posture as if they are doing it well and making money at it, but no one has yet seen the numbers, so only time will show if crowd funding works in real estate or not.
2. Microlending: A concept that’s been around for awhile but is gaining steam as a new trend in lending is microlending. This is the giving of small loans from an individual or group to an impoverished person or business. Most commonly associated with the website ‘Kiva,’ microlending allows individuals and businesses to obtain credit in a geographic area where credit may not be readily available such as in Africa, South America, or in Asia.
As technology continues to advance in the area of private money loans, more trends like these will grow and thrive to fill the demand for credit. For those who have trouble obtaining loans, concepts like these will be welcomed with open arms. If you are seeking a real estate loan, this is our particular speciality in the area of private money lending. For more information on our real estate loans, please check out our loan programs page or submit a loan request to us today by clicking here.
Posted by Corey Curwick Dutton
Whether you’re seeking to fix up a property you already own, or you’re buying a property to fix up, loans for rehab are essential for real estate investors. But what type of financing is out there for real estate investors who are rehabbing their investment properties? The most popular choices are: the FHA 203k rehab loan, a Home Equity Line of Credit, also called a HELOC, or a hard money rehab loan.
Only owner occupants and non-profits are eligible for FHA 203k rehab loans. So if you’re a real estate investor with a non-owner occupied investment property, forget about it! And if you think you’re saving loan fees by going FHA, forget about it. FHA 203k rehab loans come with a higher interest rate than standard loans. And if you think you’re saving money on loan fees by going FHA, well, think again. Loan fees, also called “points,” on a FHA 203k loan start at 2.75% and go up from there depending on how much your broker or bank is going to tack on top of the 2.75 points. Then there’s the appraisal fee, the ongoing inspection-related fees, and finally the big one – 0.55% ongoing for loan insurance!
For those who had utilized home equity lines of credit (HELOCs) from their banks prior to the real estate crisis, these types of loans are now extremely hard to get. Many banks who used to offer these types of loans no longer offer them. And for real estate investors with non owner occupied properties, most banks don’t even offer equity lines of credit on investment properties anymore! So what is the best option for financing for rehabs?
Real estate investors who know, tend to go in the direction of hard money rehab loans when seeking rehab financing. Hard money rehab loans are much easier to obtain and fund faster than traditional bank loans. Because these loans come from non-bank sources of financing such as private individuals, the requirements are much less stringent. Although the cost of a hard money rehab loan is typically higher than a standard line of credit or an FHA 203k rehab loan, the opportunity cost of not getting a loan is much higher. And for those who aren’t eligible for an FHA 203k rehab loan, or don’t qualify for a HELOC, there is no option other than a hard money rehab loan. If you’ve never had a hard money rehab loan before, read a post we wrote on this topic called, 6 Items You Need to Close a Rehab Loan Fast.
Posted by Corey Curwick Dutton