Never Fund a Loan on Real Estate Without Having a Trust Deed
Real estate investors have long used private money lenders to finance their real estate investments. A real estate investor, who we funded loans for in the past, confided in me that he was preparing to do a new property acquisition using a friend’s private funds. His friend was planning on advancing him the funds to purchase the property, and in return, would charge both interest on the funds and a small percentage of the profits.
I asked how the lender planned to secure the loan and the investor informed me that the lender would only require a promissory note to be signed to secure the loan. So, what is the problem with this private lender making a loan to this investor?
The Promissory Note
The problem is with the Promissory Note that is intended to secure the debt on the property. A promissory note is only a “promise to pay,” but it is generally not recorded. In order for a private money lender to secure repayment of a promissory note with the real estate, a lender must use a deed of trust, or a mortgage.
If the private lender makes the loan to the investor and secures it to the real estate with only the promissory note, this will not be sufficient security.
A deed of trust is sometimes referred to as a security document because it secures the promissory note to the real estate by creating a record in the County where the real estate is located. This recorded document creates the lien against the property that is a notice to the world that there is a debt owed to the lender. Without it, the investor could resell the property without paying back the lender.
Pay attention to this if you’re planning on making private money loans to friends, investors, and others. Always use a Deed of Trust or a mortgage to secure repayment of a promissory note with real estate.
Further, consider using a seasoned, Private Money Loan Broker to handle your next private money loan transaction to make sure it is done correctly. A seasoned Private Money Loan Broker understands all of the steps and documentation requirements to make sure you’ve secured your debt properly for piece of mind. To learn more, check out a recent post we wrote on this topic, ‘How to Become a Hard Money Lender.’
3 Things You Ought To Know About Hard Money Lenders
Real estate investors have long used hard money lenders to finance their real estate investments for reasons of speed and flexibility. But for those who have never taken out a non-bank loan before, there are certain things every real estate investor should know about hard money lenders. Here are just 3 things every real estate investor should know:
Not Every One of Them Is Legit
There are a lot of loan scams in the hard money space so be wary of fake lenders who don’t have the ability to do a deal. Most of them are just collecting upfront fees from borrowers!
Protect yourself by reading this post: How To Avoid Lending Scams
Don’t Assume a Hard Money Loan is Like a Bank Loan
Never Expect No Documentation Just Because it’s a Hard Money Loan
So many people assume that just because it’s a hard money loan that there are absolutely no documents required, e.g. loan application, credit report. Although the documentation requirements of a hard money lender may be LESS than a bank lender for a loan approval, it does not mean they are non existent. Each lender has its own list of documentation requirements, so ask and don’t expect or assume that there’s no documentation required.
These are just 3 important things that every real estate investor should know about hard money lenders. Are you a hard money lender yourself, or are you a borrower who is seeking private money financing? What else would you add to this list?
Do You Know Any Private Money Lenders? 5 Reasons You Should
Both real estate investors and small business owners are two groups that commonly utilize private money lenders. A private money loan is any loan from a non-bank source of financing. Most auto financing falls under the category of private money loans, just like hard money loans used in real estate investing. Because these loans can fund much faster than traditional financing, they allow individuals to capitalize on opportunities or to solve problems. But why should you know a few private money lenders? Below are just a handful of the reasons why you should have a few private money lenders in your digital rolodex:
1. Bad Credit Nightmares: a foreclosure, bankruptcy, or other credit issue can really limit an individual’s ability to borrow money. Most private money lenders don’t care about credit, and will lend to you anyway. If you have bad credit, knowing a few private money lenders is a must. You never know what opportunity could come along for which you’ll need financing.
2. Fast Real Estate Acquisitions: Good real estate deals are typically done very quickly, with all cash, and don’t wait for bank financing. But because private money lenders can make quick lending decisions, hard money loans can work like ‘all cash,’ because of their rapidity of funding.
3. Inventory or equipment purchases for business: Small business owners are often unable to obtain credit lines. Private money lenders will step up to provide credit to small business owners when banks will not. The availability of this type of credit can be life or death to a small business.
4. Buy Outs: Whether it’s a partner, family member, or business entity you are looking to buy out of an investment, a private money loan is a great alternative to complete a buy-out. Often it is cheaper to pay interest on a loan, rather than keep a bad partner in an investment. Private money loans are commonly used for this purpose.
5. Repairs to real estate owned: Many banks won’t lend money for repairs, improvements, or for additions to real property. Private money lenders, on the other hand, will make loans for repairs, improvements, and will also lend on vacant, distressed properties.
These are just a few of the reasons you could find yourself needing a private money lender sometime in the near future. By making relationships with non-bank lenders, you can create opportunities for yourself or provide solutions to problems. For more information on our private money loans, take a look at our loan program page and keep our contact information in your rolodex!
How To Get a Loan for Rental Property
A real estate investor just starting out often asks, how to get a loan for a rental property? The answer is simple: cast the net out wide and consider various options. However simple this answer may be, it is far too vague. So I will attempt to delve a bit deeper into answering this question, and explain in more detail how to get a loan for rental property.
Do you have a need for speed?
If you are purchasing new rental property and have a need to close, whether on an all cash purchase, or on a last minute wholesale deal, a hard money loan is the best option. Even if a buyer is “pre-qualified” with a financial institution, a traditional loan cannot close fast enough to mimic an all cash transaction. Only a hard money loan can close fast enough to mimic all cash, because it can close in a few days. If speed is required by a real estate investor to successfully complete a purchase transaction, a bank loan is not an option. Look for a hard money lender to finance purchases that require speed in closing.
Do you understand all of your alternatives?
If you’re trying to refinance rental property, there are many alternatives for financing. Because rental income can be proven via bank statements or tax returns, it is far easier to refinance rental property with a bank loan rather than to purchase one. Particularly if a rental property is vacant or in need of rehab. If a rental property is vacant or in distress, once again, a hard money loan may be the only option on a purchase. Once a rental property has been purchased, rehabbed, and rented, a bank loan will take out the existing hard money loan.
Are you seeking a loan for more than one property?
If you already own a portfolio and are seeking to refinance your rental property, there are rental property loans specifically for rental property portfolios. This is a loan that you would get after you’ve purchased and stabilized a portfolio of rental properties. This type of loan for rental property requires lease agreements, a rent roll, a dedicated bank account where all rental deposits should be placed, and tax returns for the business entity that holds title to the rental properties. These items are those that will be required to qualify for a bank loan to refinance rental property.
If you still want to know more about how to get a loan for rental property, or if you are seeking rental property loans, leave a comment below with your contact details. Or send us a message via our contact page, and we will respond to your questions promptly.
How to Become a Hard Money Lender
In order to become a hard money lender, also called a trust deed lender, there are several things to think about.
Before you start lending your money, get started on the right foot.
A private money loan is any loan from a non-bank source. A hard money lender is one type of private money lender that uses “hard” assets as collateral for loans.
The most commonly used asset for hard money loans is real estate.
In order to become a hard money lender, there are four important things to consider:
1. Do you fully understand how trust deeds work? Further do you understand the foreclosure laws in the State you are lending in? If not, it’s crucial to find a good attorney, specifically a real estate attorney or other attorney who has specific experience with trust deed lenders.
2. Do the laws in the State you are lending in allow you to make loans without a license? Before you start lending your own money, make sure you’re following regulations under your State laws. For commercial properties with 5 or more units, there are no licensing requirements for lending one’s own money.
But in certain States, lending your own money on residential real estate is prohibited unless you have a mortgage license yourself, or unless your loans are originated by a licensed mortgage broker. If you’re unsure, don’t ask your attorney in this case but rather call the Divisions of Real Estate and/or Mortgage Lending at your State level and talk to someone about what type of lending you plan on doing.
This is the fastest and cheapest way to make sure you aren’t required to have a license to lend your own money in a particular State. Because every State has different licensing requirements, don’t make assumptions that you don’t need a license, even if you’re lending your own funds.
3. In what form will you lend your funds? E.g. as an individual, as an IRA, as a Limited Liability Company, as a Trust? Decide how you will lend your money.
Will you lend from your personal funds in your individual name? Or will you make the loan as a business entity such as an LLC using funds from a business account.
4. How well do you understand real estate, or are you comfortable owning real estate? Should a property go into foreclosure you may have to own a property, at least for a short term.
Unless a broker or other third party will manage the asset until it sells, a foreclosure can mean being a property owner. If you must fly to where the asset is located, this is something that will have to be considered should you have to own a property.
So how does one become a hard money lender? Start by carefully considering the four items previously listed, and certainly consult with an attorney if you don’t understand the ins-and-outs of trust deed lending. Although you certainly don’t need an attorney to hold your hand on every loan, it’s certainly wise to consult with an attorney at the outset.
An attorney will also prepare your loan documents; these are the documents necessary for making a trust deed on real estate.
In order to become a hard money lender, make sure you set out on the right foot and do things right.
Understand the process, understand your legal requirements, and feel comfortable about the collateral and where it’s located. Most important take things slowly as becoming a trust deed lender won’t happen overnight. If you try and rush into it, the result may be disaster, so take your time and do your homework.
Why Investors Need Loans for Investment Properties
Real estate investors use both debt and equity to finance their transactions, but loans for investment properties are quite commonly used. There are many reasons why real estate investors seek out debt financing for their properties. Here I will only discuss 3 reasons real estate investors seek out debt financing over equity financing. One very popular type of loan for investment properties is called a hard money loan. A hard money loan is any non-bank loan against a ‘hard’ asset such as real estate. This type of loan has less requirements as compared with a bank loan, but also comes with a higher interest rate. Despite the higher interest rates associated with these loans, here are 3 reasons real estate investors leverage this kind of debt:
Quick Loan Fundings: As compared with bank loans, loans for investment properties, such as hard money loans, fund very quickly. For example, a typical hard money loan can close and fund in between 5 to 14 days. In contrast, a bank loan can close and fund in an average of 21 to 45 days. For a real estate investor who must move quickly to take advantage of a good price on a purchase, the quick loan fundings of hard money loans are crucial for success.
Lower Qualification Requirements: Bank lending standards still haven’t relaxed much since the onset of the Great Recession in 2008. For example, in order to qualify for a commercial bank loan, an investment property cannot be vacant, except in rare cases. Because hard money lenders are willing to make loans against properties with low or no occupancy, it allows real estate investors to buy undervalued assets and stabilize them. They can later refinance these short-term loans on their investment properties with permanent bank financing.
Opportunity Cost: During 2009 to 2010, when so many assets were available at low prices, real estate investors leveraged debt in order to make their cash go further. To have all of their available cash tied up in just one asset would have been unthinkable. Investment property loans allowed these investors to make their cash go much further, and thus, they were able to pick up a larger number of distressed assets during the years between 2009 to 2010.
These are just 3 reasons why investment property loans are so necessary to real estate investors. Real estate investors with large portfolios of 5 or more properties, can use these loans to leverage their portfolios. What else would you add to this discussion? Have you had an experience where a hard money loan was crucial to your success in some way? Please share.
For more information about the different types of investment property loans offered by Private Money Utah, visit our loan programs page here, or please send us a message via our contact form and we will be in touch with you soon.
Investor Used Hard Money Lender to Finance Spec Home in Park City
Why would a real estate investor who invests in high end, luxury homes ever use a hard money lender? In this story, a real estate investor in Park City, Utah has experience in the local market using hard money loans to finance his projects. The area is renown for its ski-in, ski-out properties, and when deals become available in Park City, Utah, real estate investors flock towards these homes for use as both investments, and as second homes. And for the financing of these fast purchases, whether as lot loans, construction loans, or rehab loans, this is the specialty of hard money lenders. Hard money lenders are also able to lend on properties that most banks won’t or can’t lend on, such as land or vacant property.
The investor in this story, James O’Connell, could easily qualify for a bank loan, as his credit is impeccable and the income from his growing business is more than sufficient to qualify. Under this particular scenario, James financed a speculative home construction project himself. Leveraging only a small bank loan to acquire the lot, James used his own cash to fund the bulk of the total project cost. This was James’s first mistake on this project. Never start out with too small of a loan on a construction project. Once you commence construction and liens begin to pile up on a property, you may never be able to obtain additional financing to finish the project should you run into problems along the way.
The biggest hurdle the investor James O’Connell had to overcome on this project was that his general contractor had gone grossly over budget on the cost of the construction. This pushed James’s cash reserves to the limit. Convinced it would be no problem to fund this spec construction project himself, James was disappointed to discover that this would not become reality. In a stage where he was 90% complete with the project, he turned to Private Money Utah, a local hard money lender in Park City, Utah who had financed two of his previous projects. Unfortunately, the local lender was brought into the project at a dangerously late stage in the game. Most lenders would immediately turn away from such a loan scenario, given that it would be difficult, if not impossible, to obtain lender’s title insurance for a loan to complete this project. During a construction project, the interests of subcontractors and other vendors can later show up as mechanics liens.
Because of his relationship with Private Money Utah, James was able to get them to work on his behalf, along with a knowledgeable title company, to have the majority of the interests removed from the property that were placed on it by sub contractors. Because the general contractor could prove he had paid the subs, they removed their claims, one by one. By funding the loan in tranches, as claims by sub contractors and vendors were slowly removed from the property, James was able to complete the project with no delay. This timely funding was also extremely crucial, as James was rapidly approaching the onset of the busiest time of year in real estate sales in the Park City market.
Because Private Money Utah is a hard money lender who understands the market, the borrower, and the unique needs of the project, James finished the house in time for the high selling season. James quickly sold the home within two months of obtaining the certificate of occupancy for the property. What were some of James’s biggest lessons learned on this spec construction project in Park City?
Never start a construction project with too small of a loan at the outset and expect to finance it with your own cash or private equity. Even hard money lenders will shy away from funding such projects if construction has already begun.
Get a hard money lender to finance the entire project at the outset to see it through from start to finish.
To learn more about our real estate financing programs, send us a message on our contact page or leave a comment below. Private Money Utah is the premiere hard money lender in Utah and in the Western U.S. for all types of private money loans on real estate.
Loans for Rental Property Allow Investors to Leverage Portfolios
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.
Keep Open Door Policy with Your Hard Money Lender
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.