The Future of Fix and Flips: Navigating 2024’s Real Estate Challenges

Since the peak in the first quarter of 2022, the number of home flips nationally has been on a steady decline. With the rapid interest rate rises that started at the end of the first quarter of 2022, sales volume nationally took a nosedive, and the rate of home flipping started on a downward trajectory.

For those new to the concept, home flipping involves purchasing a property and reselling it for profit, often after making significant repairs and improvements. Understanding your financing options, such as through our Fix and Flip Loans, is crucial to success in this venture.

Challenges Posed by Overvaluation and Market Saturation

Stagnation in Property Sales and Impact of Rising Rates and Value Decline

Many home flippers were stuck holding flips they couldn’t sell at the end of 2022 and throughout 2023. This is due in part to higher interest rates that began to freeze home sales volume, but also due to properties going down in value from the time they were purchased, to the time when they were resold. This downward trend in prices, combined with increased holding time frames, has caused many home flippers to lose money .Navigating the financial landscape is key for flippers, especially in challenging markets. Learn more about your options with our guide on Hard Money 101.

Particularly for home flippers that flip multiple properties at the same time, many were stuck holding multiple homes they could not sell. This downward trend in prices has also hurt the hard money lenders that loaned to home flippers in 2022 and 2023. Many of these new and eager hard money lending funds loaned way too much on these homes. The high loan to value ratios on these properties prevented many home flippers from refinancing them with long term financing.

What does 2024 and 2025 hold for home flipping in the U.S.? Many expect interest rates to go down in 2024, which would unfreeze sales and may increase the number of home flips in 2024 and 2025. However, many experts remain pessimistic that rates will go down in 2024, given the booming U.S. economy and persistent inflation. But it’s more than interest rates that will affect the home flipping game in 2024, so stick around as I discuss some of the factors that I believe will make or break home flippers in 2024 and 2025.

The Evolution of the Fix and Flip Market

The Role of Media in Home Flipping Popularity

Introduction to Home Flipping
Home Flipping is a term used to describe purchasing a property and then reselling it for profit. The term “fix and flip” refers to fixing up a property, e.g. making repairs and improvements, and then reselling it for a higher price later. Home flipping went bananas in the years leading up to the Global Financial Crisis. The number of homes being flipped nationally was at a record level in 2005 due to easy credit terms and low interest rates.

As the market evolves, so do the financing options available to investors. Our Bridge Loans provide another avenue for those looking to navigate the gap between purchasing and selling properties

Regulatory Changes and Market Impact
In 2006, HUD created a new regulation which imposed a legal requirement that you must own a property longer than 90 days between purchase and resale in order for that property to qualify for a FHA loan. This requirement was pretty much removed in January 2010, which opened the floodgates again in 2011 when the number of homes flipped nationally began to increase significantly.

Media Influence on Home Flipping
After 2012, a number of television shows launched that glamorized home flipping. These Hollywood story versions of home flipping enticed a larger number of people into the fix and flip space. Shows like TLC’s “Flip That House,” and HGTV’s “Flip or Flop”, among a dozen similar shows, made home flipping seem so easy that anyone could do it.

The Hype and Reality of Home Flipping
Often understating their true project costs, and exaggerating profit margins, these shows hyped home flipping to another level. As a result, thousands of aspiring home flippers entered the home flipping market in 2015, which was another contributing factor to the increase in the number of homes flipped from 2015 to the peak in 2021. 

Education and Scams in Home Flipping
Prospective house flippers started to pour money into multilevel marketing programs like “Renatus” and real estate education platforms like “Fortune Builders.” In response, a flurry of real estate education seminar firms, such as “Nudge/Response Marketing,” sprung up, hoping to profit millions from those seeking the “insider’s track” to house flipping. With titles like “Power Flip” and “Flipping for Life,” scammers like Nudge/Response Marketing lured prospective house flippers into expensive seminars in order to upsell them on even more expensive real estate investing courses with price tags as high as $30,000!

Trends and Changes in Home Flipping Volume
The number of homes flipped nationally increased steadily from 2015 and reached record levels never seen in U.S. history by 2021. The number of homes flipped nationally in 2021 even surpassed the record levels achieved in 2005, right before the Global Financial Crisis. In the first quarter of 2022, the number of homes flipped nationally reached an all time high. As soon as interest rates started to increase in March of 2022, the number of homes flipped nationally has declined steadily into 2024.

Evolution of Fix and Flip Financing

Entry of Institutional Investors Impact on the Market

In 2016, institutional investors entered the single family home market in a major way. Since 2016, the percentage of single family homes purchased by institutional investors has increased every year. This has created competition for home flippers, who are far less capitalized as compared to deep pocketed, institutional investors. This has also contributed to low inventory levels of single family homes under $300,000. This is because institutional investors purchase lower priced homes to hold as rental properties, thereby removing them from inventory altogether.

Hard Money Lenders Saturate Lending Market and Expand Financing for Flippers

From 2017 to 2022, there was a rapidly growing number of newly formed, hard money lending companies that were setting up to lend to home flippers. Hard money lending funds like Temple View Capital, RCN Capital, Lima One, and others, were offering leverage of 90% of total project cost (purchase + rehab cost) during the boom time from 2017 to 2022. And even more lenders followed suit, resulting in a glut of fix and flip lenders from 2020 to 2022 that created an oversaturation in the fix and flip lending market. Fix and flip investors took advantage of the increase in capital availability, which fueled a fix and flip boom up to the peak in Q1 2022.

Increased Competition from Wholesalers
Along with the increase of fix and flip lenders, also came an increase in the number of real estate “wholesalers” who sell properties to home flippers at a profit. As more wholesalers entered the market from 2018 to 2022, competition among them increased. As a result of increased competition, wholesalers increased their profit margins from an average of $10,000 profit per property, to as high as $50,000, or more. In fact, many home flippers have complained that it’s been the ever-increasing profit margins of wholesalers in recent years that has devoured their profit margins.

The Emergence of iBuyers
And with the boom in home flipping, also came the notorious “iBuyers” who wanted a piece of the “fix and flip” pie. These were the internet based, fix and flip buyers, like Opendoor, Offerpad, RedfinNow, and Zillow Offers. iBuyers use internet based software to make instant offers to home sellers who had listed their homes online. Sellers received electronic offers to purchase from iBuyers with the promise of no hassle, fast closings.  iBuyers purchase properties and then “flipped” them for a higher price, exactly like a regular home flipper, but at scale. As the median home price nationally came down in 2022, many iBuyers were out of business overnight and found themselves holding thousands of homes that they could not sell for more than they purchased just a few months before. 

Challenges Facing Flippers and “Fix and Flip” Lenders



Impact of Rising Interest Rates on Home Flipping

When national home prices took a dive in 2022, many of these new, “fix and flip” lenders that were offering such high leverage got a reality check. So many of these funds were, and are, run by inexperienced fund managers who weren’t investing before the GFC, or run by overconfident ex-stock traders, that simply lacked the knowledge and expertise to float the boat in low tide. Many were just lending other people’s money, running amok, and making millions on the rising tide, never noticing that the tide was slowly going out. 

The Freeze in Real Estate Sales
Many of these funds were sitting ducks when real estate sales began to freeze up in 2022. For those hard money lending companies that obtained their funds from the secondary market, the rising cost of capital in 2022 was making them even less competitive in an oversaturated market.

Hardships for Home Flippers
Many of these lenders found themselves holding overleveraged loans on properties without an exit, because the properties weren’t selling. And because the loan to value ratios were so high, they could not find a refinance either. At the time this article was written, February of 2024, many of these same lender’s loan portfolios are in shambles due to a frozen real estate market. Loans made at 8% in 2021 that were supposed to be 12 month loans, ended up being 24 month loans in a rapidly rising, interest rate environment. 

For home flippers with homes that won’t sell, the interest on these hard money loans continues to pile up, making their situation worse. This will force many of them into foreclosure and their lenders will have to own the properties at levels where they won’t be able to recoup their interest, and in some cases, their principal. 

Persistent High Prices and Competition
Despite the escalating interest rate environment of 2022 and the first half of 2023, home prices nationally really didn’t go down very much during that time frame. It is not so much that we have a low inventory of homes for sale, it’s more that we have a low inventory of “affordable” homes for sale. Prices of single family homes are at the highest level in U.S. history, and higher interest rates for the past two years haven’t done a lot to change that in many areas of the country.

The Continued Struggle in 2024 and Beyond for Flippers

Persistent High Interest Rates and Their Impact
The elevated interest rate environment has dramatically decreased national home sales volume in 2022 and 2023, reaching lows at the end of 2023 not seen since 1995. This slowdown extended the duration of time from purchase to resale for fix and flip investors, leaving many with unsold properties acquired in the spring of 2023 and earlier. Despite these challenges, high home prices persisted, squeezing the profit margins of flippers for the foreseeable future.

Inflation and Interest Rate Outlook
With overall inflation still stubbornly high, particularly services inflation, the Federal Reserve doesn’t have any incentive to lower interest rates. And unless inflation gets under control in 2024, rates won’t go down. This means home sales volume will stay largely unchanged in 2024, and as a result, the number of home flips nationally may continue to decline in 2024. 

Rising Costs in Construction
The cost of construction, materials and labor, has not seen much deflation since interest rates began increasing in March of 2022. This has increased the cost basis for home flippers, further reducing their profit margins. In fact, besides wholesalers who are taking most of the meat off the bone for home flippers, the cost of building materials and labor is another factor that is eating up home flipper’s profit margins.

Increasing Competition in the Market and The Impact of Institutional Investors
Another challenge that home flippers face is more competition than ever before. I already mentioned the entrance of institutional investors into the single family home space that has created competition for home flippers. The higher interest rate environment of the past two years has not caused a massive flight of institutional investors away from the single family homes market, in fact, they are still a driving force of competition for home flippers. Institutional investors have reduced home inventory, which has been a factor that has kept home prices still at historically high levels, threatening home flippers profit margins. And with access to endless pools of capital, institutional investors could put many home flippers out of business in 2024.

Emergence of Newbie Flippers
The wave of real estate education platforms that appeared from 2018 to 2021 has produced thousands of newbie home flippers that are eager to get their first home flip deal under contract. The wave of newbie real estate investors has created a ton of new competition for experienced home flippers in recent years. 

The Role of iBuyers
Despite setbacks in recent years, iBuyers remain a formidable presence in the flipping market. Leveraging technology and substantial capital, they are able to swiftly make offers on properties, potentially outmaneuvering traditional flippers. As iBuyers continue to refine their processes and reduce operational costs, they are expected to capture an increasing share of the market, further escalating competition for independent flippers.

Maximizing Your Fix and Flip Success: The Power of Networking and Building Strong Relationships

In a highly competitive environment for home flippers, networking is more important than ever. Institutional investors and iBuyers don’t have access to local real estate networking where many deals are made. Examples are local real estate associations and clubs where real estate professionals gather to network, exchange deals, and make connections. It is in these environments where many fix and flip deals are found and made. As competition stiffens in the home flipping game, these local networking opportunities will be a crucial factor in a home flipper’s success. 

The most successful home flippers always cite “relationships” as a key factor in their success. Building strong relationships is key to finding and capitalizing on the best deals. Discover how real estate rehabbers can resell properties for a premium, showcasing the power of networking, in our detailed post here.

It’s the relationships with realtors, lenders, contractors, and other real estate investors that newbie competitors, institutional investors, and iBuyers simply don’t have. And it’s these key relationships that will make the difference in 2024 and beyond for those home flippers that stay in business, and those that don’t. 

Expanding Funding: Key to Home Flipping Growth

The Intensifying Competition Landscape
Competition will only grow more intense if interest rates do head downward in 2024 and 2025. Home flippers will be competing with, not only eager home buyers, but also, institutional investors, iBuyers, newbie real estate investors, cash buyers, and foreign direct investors with cash. 

The Crucial Role of Funding in Home Flipping Success
In order to succeed at house flipping in 2024 and 2025, real estate investors will need to be able to compete, and having funding is essential. Hard money lenders like me create that funding for home flippers. And with a glut of “fix and flip” lenders that have appeared since 2018, there is more funding available for fix and flip investors than ever before in U.S. history.

The Advantage of Diversified Financing Strategies
Home flippers that limit themselves to one lender, won’t be able to scale as quickly if the real estate market does unfreeze in 2024. Many sellers that wanted to sell, held off from selling in 2022 and 2023 because of higher interest rates. If rates do go down in 2024, a lot of pent up inventory may hit the market in a short period of time, and there may be more than one opportunity available at any given time. For home flippers with relationships with multiple hard money lenders, it will be much easier for them to scale and do more than one deal at a time. 

Navigating Seller Hesitancy in a Shifting Market
Even with potential rate decreases, the market may not instantly heat up. A “wait and see” approach from sellers, anticipating further rate drops, could maintain a lukewarm sales environment well into 2024. Flippers will need to navigate this uncertainty carefully, balancing the eagerness to invest against the risk of a sluggish market rebound.

Smart Strategies to Reduce Risks in Fix and Flip Projects

Skill in Evaluation and Cost Management
Experienced home flippers also have an edge on newcomers into the home flipping scene. They are able to evaluate an opportunity faster, determine costs of rehab more accurately, and take advantage of higher profit margins as a result. To be successful at home flipping you need to understand the market, neighborhood characteristics, and have relationships with both realtors and local contractors.

You also need to be able to keep your costs under control to maximize profits. Because beginner home flippers lack the experience, they will pay higher prices for homes, pay more to renovate the homes, and have less profits as a result. This will result in deterring many of them from continuing in the home flipping business, and will give even more of an edge to experienced home flippers.

Understanding the ins and outs of rehab loans is crucial for managing your investment and reducing risks. Find out how rehab loans work and how they can be a game-changer for your flipping strategy.

Balancing Flipping with Stable Employment
As home flippers gain more experience, they often fall into the trap of taking on too much. As a hard money lender to real estate investors, the biggest cause of failure that I’ve seen is taking on too much at one time. If one home doesn’t sell as quickly as anticipated, it can cause a domino effect for a home flipper that can lead to a rapid free fall.

In 2024, my advice to experienced home flippers is to find a day job and make home flipping a side gig until we can see that sales volume nationally has started to rebound.

Dynamic Pricing to Facilitate Sales
And for those home flippers who are holding flips in 2024 that are hangovers from 2023 (or even 2022), reduce the price until the home sells. That means, lower the price every, single day if that’s what it takes to get the house sold. Particularly for home flippers who have hard money loans on properties they can’t sell, they should cut their losses early and sell at a lower price rather than hold onto a property that costs them more for every day that they hold it.

Negotiating with Lenders
For those that are unable to refinance and hold the homes as a rentals because their hard money lenders gave them too high of leverage, they should consider negotiating with their hard money lenders for reduced loan payoffs so they can refinance.

Predicting the Winners in Home Flipping for 2024 and 2025

Advantage of Focusing on Median-Priced Properties
The most successful home flippers in 2024 and 2025 will be those that can purchase and rehab homes below or near the median home price. Homes priced under $350,000 are still selling quickly, and some for over asking price. However, this is the same home price category being targeted by institutional investors who want to buy and hold the lower priced homes as rentals. This is where local networking and relationships will give home flippers an edge on institutional investor competition. 

Cost-Efficiency in Renovation
Home flippers that know how to not “over-improve” a property for its target demographic will also have success stories in 2024 and 2025. This is because of the persistent inflation in construction materials and labor.

These items are at a premium, and with so much demand in the construction sector that has remained strong even in a higher interest rate environment, expect inflation in building costs to continue. For home flippers that correctly identify what their target demographic is looking for in terms of updates and improvements, they will save significantly on the rehab costs as compared with new market entrants.

The Role of Capitalization and Lender Relationships
The winners in 2024 and 2025 will be well capitalized and have good relationships with multiple hard money lenders. Institutional investors have unlimited access to large amounts of capital, and can pay cash for properties. In order to compete with them, home flippers need to be well capitalized.

Reconsidering High-End Flips
Home flippers that target luxury home flips of $750,000 and above will continue to suffer in 2024 and 2025 as they have done in 2022 and 2023. In many U.S. cities, in response to the pandemic migration trends, home builders created a glut of homes priced over $1 MM.

This means that home flippers who targeted luxury home flips have been competing with new construction homes over the past several years. And because many of these new construction, luxury homes are still sitting on the market as we enter 2024, luxury home flippers will continue to compete with brand new builds. Bottom line, home flippers who are considering getting into luxury home flips in 2024 should probably think again. 

Upcoming Trends in Home Flipping: What to Expect

iBuyers’ Impact on the Fix and Flip Market

Targeting affordable homes for renovation is a trend that will yield high margins for home flippers in the coming years. One example is flipping mobile, or manufactured, homes. This requires skill in carpentry and improvisation, but given the lower price point of the finished product, there will be a steady demand for these affordable homes. 

Home flippers also may need to change their business models to survive if the real estate market stays frozen, margins stay razor thin, and competition remains high. For example, changing the business model from a “home” flipping business, to a “property” flipping business. Properties that can be rented by workers, veterans, or members of an aging population are in high demand. One example of a “property” flipping business model is the conversion of a motel into an affordable housing property for local workers. Once the property is renovated and rented out, a flipper can sell it for a profit to a long term hold investor. 

Wrapping Up: Key Insights for Future Home Flipping Success

Recap of the Boom Years
The fix and flip market thrived from 2015 to 2022, buoyed by factors such as low interest rates, an abundance of funding options, increased competition, the rise of iBuyers, widespread real estate investment education, and the media’s glamorization of flipping.

Challenges Since 2022
The landscape shifted in 2022 with rising interest rates leading to a significant decrease in home sales volume. This slowdown has left many flippers and their lenders with unsellable properties, directly impacting profit margins.

Impact of Market Conditions on Profits
The number of homes being flipped in the U.S. has been on a steady decline since 2022 when interest rates started to go up. An extremely low volume of home sales has prevented home flippers from moving properties quickly. As a result many home flippers, and their lenders, are holding properties that cannot be sold or refinanced.

And then profit margins of home flippers have been eaten into by a variety of factors including the increase in the number of, and profit margins of, wholesalers, inflation in the cost of construction materials and labor, and the longer holding times which require more interest to be paid on the underlying hard money loans. 

Strategies for 2024 and Beyond
If rates do go down in 2024 and 2025, home flippers need to be well capitalized as compared to their competitors. This will allow them to not only compete with buyers with deep pockets, but will also help them scale their businesses faster if the opportunities arise.

Adapting to Market Realities
If interest rates stay at 2023 levels for most of 2024 and 2025, home flippers should consider targeting affordable homes to remodel and stay away from luxury home flips. They may even consider changing their business models from home flipping to property flipping. 

Diversification of Funding Sources and Managing Costs
Success will likely favor those who diversify their funding sources, manage construction costs efficiently, and refrain from over-improving properties.

Building Strong Networks
Establishing and nurturing relationships within the real estate community will enhance competitiveness against iBuyers and institutional investors, providing a strategic advantage in the evolving market.

Ready to dive into your next fix and flip project but need financial guidance? Don’t hesitate to contact us for personalized advice tailored to your unique investment needs.

Copyright © Corey Ann Dutton, Private Money Utah, Wolf Creek Mortgage, Inc. This content may not be reproduced in any form without the explicit, written permission of Corey Ann Dutton.

Private Money Loan vs. Traditional Loan: Which is Right for You?

Understanding the differences between Private Money and Traditional Loans

In real estate, 2 primary sources of funding emerge as the frontrunners.

•The 2 most known sources are traditional lenders, including banks and mortgage companies.

•The second source and least known, are private money lenders.

Each source has its own advantages and constraints, making the choice between them fairly easy depending on the situation. This article explains the critical differences between private money loans and traditional loans. This should help guide you in making the right choice between using one source over the other, depending on your future circumstances.

Maybe right now you believe you could never need a private money loan, but think again. In this short article, you may find out a private money loan may be best for your needs, now or in the future.

Table of Key Takeaways between Private Money Lenders and Traditional Lenders

Aspect Private Money Lenders Traditional Lenders
Loan Processing Speed Faster Slow
Credit Flexibility More flexible, no min credit scores Strict credit requirements in most cases
Collateral Requirements Focus is on asset Comprehensive asset and borrower analysis
Loan Terms Customizable, short-term Standardized, long terms
Prepayment Penalties None or shorter Almost always
Ideal for Fast funding, shorter term Slower funding scenarios, longer loan terms, lowest rates

The Speed of Loan Processing between Private Money and Tradition Lenders

Private Money Lenders: Renowned for their speed, private money lenders leave traditional lenders in the dust when it comes to closing loans quickly. Private money lenders are often the go-to choice for time-sensitive real estate purchases, or other situations where a fast loan closing is the top priority. Private money lenders gather documentation quickly that’s required to close a loan, usually in a matter of days.

This means you, as the borrower of a private money loan, must be ready to put everything on hold in order to provide documentation quickly during loan processing. A private money lender’s processing time is almost always constrained by the speed of the borrower in providing the requested documentation. Here are some of the most important items that every private money lender will need to process your loan quickly.

Traditional Lenders: In contrast, traditional lenders are much slower in processing their loans. Typically a loan processor for a bank or mortgage company is juggling a number of different loans simultaneously so response time is much slower.

And it’s not unusual for the list of documentation to grow either. Just when you think you’ve provided everything on the list to the loan processor, more and more documents are requested!

It’s the slow processing times of banks and mortgage companies which make them a poor choice for time-sensitive real estate purchases, or other situations where a fast loan closing is the biggest need.

Credit Flexibility and Minimum Credit Score Requirement

Private Money Lenders: Generally more lenient with bad credit histories of borrowers, private money lenders focus more on the asset and its value. In fact, there are many private money lenders that do not require a minimum credit score.

Getting a loan from a private money lender is particularly beneficial for those who might not have perfect credit scores.

Traditional Lenders: Banks and mortgage companies have strict credit criteria and this can pose challenges for those who have less-than-ideal credit histories.

However if a bank or mortgage company offers FHA, or other government backed loans, these loans allow for a low, min credit score of 580 (at the time of this article’s date of publishing).

Ironically it’s both private lenders and the U.S. taxpayers who take on the highest credit risks, but that’s a separate topic.

Collateral Requirements

Private Money Lenders: The primary concern of private lenders is the loan’s collateral, specifically the property characteristics and value. In this context, real estate is the asset that is being put up as the collateral for the loan.

The location, age, condition, and property use are just some of the characteristics of a property that a private lender looks at. Private lenders also look carefully at property value, usually assigning a more conservative value to a property than a traditional lender would.

If the collateral is acceptable to a private money lender, and the loan to value ratio is low, a private lender will typically issue a loan approval without a minimum credit score or income requirement. This is particularly useful for real estate investors who don’t always have perfect credit histories.

Traditional Lenders: The loan collateral is also a primary concern for banks and mortgage companies, particularly the collateral value which is often determined by an appraisal. Traditional lenders generally place as much, if not more emphasis on the borrower’s income, assets, and credit history. More requirements for loan approval eliminate a lot of borrowers right out of the gates because most people don’t meet all of these requirements.

Loan Terms Flexibility

Private Money Lenders: With private lenders, you can often customize the loan term to fit shorter term needs. For example, a private lender may offer a 12 month loan when all a borrower requires is 9 months. A private lender can often modify the typical loan term of 12 months to the 9 month loan term preference of the borrower.

Traditional Lenders: Banks and mortgage companies usually offer loans with standard, specific loan terms that are non negotiable. They are suited for borrowers requiring longer loan terms, from 5 to 30 years.

Prepayment Penalties

Private Money Lenders: Prepayment penalties are deadly for borrowers who have short term loan needs. This is because if you pay the loan off early, you may owe a stiff penalty for doing so.

Because private money loans tend to be short term, usually between 6 months to 3 years, they usually do not have prepayment penalties. For example, a real estate investor who uses a fast funding, private money loan to purchase a rental property but quickly refinances with a long term, 30 year loan.

Or a homeowner who knows she will only live in a home for less than 2 years because of an inevitable job relocation. These are just two examples where a private money loan could be better than traditional financing because of no prepayment penalties. And if private money loans do have prepayment penalties, they are typically shorter, no more than 4 to 6 months.

Traditional Lenders: Almost all loans from banks and mortgage companies (at the time of this article’s publishing) come with prepayment penalties. Most with prepayment penalties of between 3 to 5 years. This means if you pay the loan off anytime before 3 to 5 years, you will have to pay a stiff penalty. Prepayment penalties are one of the most commonly overlooked items by borrowers when getting traditional type loans from banks, credit unions, or mortgage companies. Always ask about the prepayment penalty on any loan program you apply for, before you even apply. If you think you may need a loan for a shorter term than the prepayment period, then do not apply for that specific loan.

Ideal Scenarios for Each Lending Type

Private Money Lenders: They are particularly well-suited for quick processing and funding, as well as for other short-term real estate needs where no prepayment penalty is important. Private money loans are also known for credit score flexibility with approvals based more on the property than the credit score of the borrower.

Traditional Lenders: Traditional loans from banks, credit unions, and mortgage companies are better for long-term loans from 5 years to 30 years. Borrowers who want loans at the lowest possible interest rate for the longest possible term are looking for traditional loans. But in order to get approved for these loans, they demand good credit, high enough income, and a lot of heavy documentation.

Conclusion

In conclusion, understanding the differences between private money loans and traditional loans is crucial in knowing what type of loan is best for a specific situation. Just remember, the next time you find yourself needing a loan, ask yourself which type of loan would be most appropriate for the situation and use this guide to help you choose.

The choice between private money lenders and traditional lenders depends heavily on your specific needs in any given situation. And trust me, the situation will always dictate which source of funding you choose.

If you liked this post, please share it with someone you feel could benefit from it. Curious why people use private money loans? Check out some more reasons why people use private money loans on our blog. Think private money loans could be a fit for your situation? Contact us and get preapproved for a private money loan, we make it super easy, and fast!

Corey Ann Dutton, MBA, PLM, Private Money Lender

Understanding DSCR Loans: A Real Estate Investor’s Guide

In the realm of real estate loans, DSCR loans have emerged as an excellent tool for real estate investors. My name is Corey Dutton and with many years in the real estate lending industry, I’ve gained extensive knowledge about various financing options that are available for real estate investors, including DSCR loans. This guide will help explain DSCR loans to you, while offering some insights for you in your journey to finance your purchases of investment real estate.

What is a DSCR Loan?

DSCR, stands for, “Debt Service Coverage Ratio.” This is a term, or type of loan, that is  specifically intended for real estate investors. But why are they for real estate investors? Unlike traditional loans that focus on your personal income for loan approval, DSCR loans have a different approach.

The income potential of the investment property is the driving factor for loan approval with these DSCR loans versus your own personal income. This means that if you have income from non-traditional sources, or if you write off a lot of expenses on your taxes and don’t have a lot of taxable income – – Well, you can still qualify for a DSCR loan on an investment property. 

Now, why is this so crucial? Imagine being an investor with a golden opportunity to snag a rental property, but your personal income doesn’t quite fit the traditional mold. In other words your personal financial metrics don’t align with traditional lending criteria. That’s where DSCR loans come into play. 

These DSCR lenders look more at how much the property itself will earn in income to cover the loan payments over time, rather than the personal income, or the net worth of the borrower. If you’ve snagged a good rental property and can make enough income from the property to support the loan payments, a DSCR loan may be a good fit. Let me tell you why.

 

What Types of Real Estate Can You Buy with a DSCR loan?

DSCR loans cater to a variety of income-producing properties including:

  • Single-Family Rental Property: This includes Single Family Homes, individual Townhomes, Condominiums, and even some manufactured housing.
  • Multifamily Property: Properties with more than one unit, from duplexes all the way to large apartment complexes.
  • Commercial Property: This includes retail, office, and industrial. Pretty much any commercial property that is income-producing.

Mixed-Use Properties: Buildings that combine both residential and commercial elements.

DSCR Loan Programs We Offer

We offer all types of DSCR loans for real estate investors for both the purchase and refinance of investment properties. Our DSCR loans cover a multitude of property types. A summary of the loan terms for our DSCR loan programs include:

  • Property types we lend on: income-producing property types from single family homes, to manufactured homes, from apartment complexes to industrial commercial properties. Most property types are considered as long as the property is income-producing.
  • Under 600 credit score ok
  • Loan amounts up to $50 MM
  • DSCR ratios from as low as 0.85
  • Loan terms: Interest only, 5 year and 7 year fixed, and 30 years
  • Competitive interest rates as compared with banks
  • Low points and fees

Benefits of DSCR Loans for Real Estate Investors

  1. Rental Income Evaluation:
    DSCR loans look at the property’s income potential more than the investor’s personal finances.
  2. Flexibility with Property Type:
    From manufactured or modular housing to multi-unit apartment complexes and beyond. DSCR loans adapt to various property types, freeing investors from traditional loan constraints.
  3. Credit:Even borrowers with low credit scores can qualify for DSCR loans. Some DSCR programs go as low as 580 credit score. But it’s worth noting that the lower your credit score, the MORE you’ll have to bring in down on a purchase using a DSCR loan.
  4. Perfect for the BRRRR Method of Investing:
    Real estate investors can build their real estate portfolios faster using the BRRRR Investment Strategy. Properties can be bought with hard money loans, rehabbed, then rented, and then refinanced with a DSCR loan. Real estate investors are then able to repeat this process over and over again, thereby building their real estate portfolios faster.

How to Calculate DSCR

So how do you know if a property makes enough income to qualify for a DSCR loan? It’s all about understanding the relationship between the income a property generates and the debt  owed on it. Let’s break it down, step-by-step, check it out:

  1. Determine the Net Operating Income (NOI) of the Property:
    Start by figuring out the property’s annual, net operating income. This is the total income the property generates minus its operating expenses. Remember, this doesn’t include any mortgage payments or other financing costs. In this example you will take out your property taxes and insurance as annual, operating expenses to arrive at your final NOI number. (Note: make sure not to include property taxes and insurance as part of the monthly loan payment, otherwise you would be double counting these expenses).

 

Formula:
[  NOI = Gross Rental Income – Operating Expenses (incl. Taxes and Insurance)  ]

 

  1. Identify Annual Loan Payments:
    This is the total amount you’ll pay annually for the property’s debt, which includes principal and interest *(Note: In this example you are not including property taxes and insurance as part of the monthly loan payment).

 

 Formula
[  Annual Debt Service = Monthly Mortgage Payment x 12 months  ]

 

  1. Calculate DSCR

Now, divide the Annual Net Operating Income by the Annual Debt Service. The resulting number is your DSCR or “Debt Service Coverage Ratio.”

 

Formula
[  DSCR = NOI  /  Annual Debt Service  ]

 

Example, if your property has an annual NOI of $120,000 and an annual debt service of $100,000, the DSCR would be 1.2. *(Anything over 1 is good, see below why it’s good).

 

Now what does a DSCR of 1.2 mean? A DSCR of 1.2 means the property generates 1.2 times more income than its debt. 

 

A DSCR of 1 means the property generates the same amount of the debt.  

 

And DSCR below 1 means the property is NOT generating enough income to cover its debt. 

 

Many DSCR loan programs require a DSCR of 1 or higher. If the DSCR is below 1, you can still get the loan, but you will be required to bring in a larger down payment or use your personal income to offset the difference between what your property is earning in income and your monthly loan payment.

What is a good DSCR for rental property?

In the realm of rental properties, the DSCR (Debt Service Coverage Ratio) plays a pivotal role in gauging financial health. A good DSCR for rental property typically hovers around 1.2 to 1.4. This means that for every dollar of debt, the property generates $1.20 to $1.40 in income.

However, it’s worth noting that while a DSCR of 1 indicates break-even, anything below 1 can be a red flag, suggesting potential income shortfalls. If there’s not an opportunity to increase income on the property, it may not be a good investment. As always, individual lender preferences can vary, but aiming for a DSCR north of 1.2 can keep your down payment requirement lower, and keep your personal income out of the equation entirely.

Real-World DSCR Scenario: The Case of Emilio’s Rental Property


Emilio, an ambitious real estate investor, had his eyes set on a rental property in a growing part of town. The property gets monthly, gross rents of $1,600. But Emilio’s personal income, derived from being a subcontractor, is inconsistent. Emilio writes off a lot of his expenses so his taxable income is close to zero. Traditional lenders were hesitant to approve him for a loan to purchase an investment property because his personal income is so inconsistent.

Income Potential:
The property’s potential gross rental income is $1,600 per month or $19,200 annually. After accounting for operating expenses like hazard insurance, utilities, property management fees, and property taxes, the annual, Net Operating Income (NOI) comes down to $15,360.00 annually.

 

Loan Details:
Emilio needs a loan of $175,000 on the property. The terms offered by a DSCR lender are: 7.5% interest rate with a 30-year term, fixed rate, principal and interest payments. This translates to an annual debt service (principal + interest) of $14,683.56 *(excludes impounds for taxes and insurance).

 

DSCR Calculation:

Using the DSCR formula, Emilio calculated his ratio: DSCR = NOI / Annual Debt Service

$15,360.00 / $14,683.56 = 1.04

 

The DSCR in this example is 1.04

A DSCR of 1.04 is a good sign. It means that the property is earning more in rental income than the debt. Another way to look at it, is for every dollar of debt, the property could generate $1.04 in income.

The DSCR lender that Emilio is talking to has a DSCR requirement of 1 for the loan amount he’s requesting of $175,000. This means that Emilio will qualify for the DSCR loan for this rental property because the DSCR is slightly over 1 at 1.04. The lender is not concerned about Emilio’s fluctuating personal income because the rental property has a DSCR over its requirement of 1. Emilio purchased the property in under 10 days using a hard money loan. Once he had the property rented, he paid off (refinanced) the hard money loan with a DSCR loan. 

This scenario shows the power of DSCR loans, but it is also a good example of how real estate investors are using the BRRRR method of real estate investing. delve deeper into the BRRRR method. Real estate investors like Emilio who are building their real estate portfolios typically use hard money loans to purchase properties quickly because a hard money loan can resemble cash transactions. Once the properties are rehabbed and rented, real estate investors are able to refinance the hard money loans into 30 year loans based on the rental income, rather than based on their personal incomes.

 

FAQs on DSCR Loans

Who Offers DSCR Loans?

Traditional Bank Lenders:

Yes it’s true, traditional bank lenders do offer DSCR loans. Banks tend to advertise these loans as “investment” property loans. Although DSCR loans from banks take awhile to fund so don’t think you can use a DSCR loan from a bank to purchase a property quickly.

If you have all the time in the world to close on the purchase of an investment property, a DSCR loan from a bank could be an option. But normally, sellers of investment properties want to sell as quickly as possible, especially if they are selling properties at good prices. The role of hard money loans in swift aquisitions. A hard money loan is typically used for the purchase of the investment property, which is later refinanced by a bank loan.

 

Credit Unions:

Similar to banks, credit unions also offer DSCR loans to real estate investors. Although sometimes faster than a bank, credit unions are still very slow in underwriting and funding loans. So if you want to purchase a property quickly, a hard money loan is your best bet. But make sure to talk with a loan officer at your credit union before you complete the purchase to make sure you understand all of the requirements for refinancing and can meet those requirements. The importance of a planned exit for hard money loans because hard money loans are short term loans of usually one year, with higher interest rates as compared with traditional loans.

Specialty Finance Companies:

These are lending firms that specialize in niche financial products and DSCR loans are often in their long list of loan offerings. Most of them are found online and are more of a broker, or loan wholesaler, rather than a direct lender. 

 

What Are the Downsides of a DSCR loan?

Some real estate investors might find the loan terms of a DSCR loan less favorable as compared with a traditional bank loan. Firstly, they often carry higher interest rates compared to traditional mortgages. Secondly, the loan approval process can take a long time, with lenders evaluating the property’s income potential by ordering appraisals which can often be very slow.

This means it’s very difficult to use a DSCR loan for a property purchase because it’s just not a fast process to get to the finish line on a DSCR loan. If you need to move fast to close on an investment property you would typically use a hard money loan for the purchase and then refinance later with a DSCR loan.

Other downsides are the shorter, fixed rate, loan terms often found in DSCR loans, which means the rate may only be fixed for 5 to 7 years. DSCR loans may also come with prepayment penalties, for example, some with up to 5 year penalties.

This means if you have a high interest rate DSCR loan, and then rates suddenly go down, you’re stuck holding the DSCR loan for 5 years because it has a 5 year prepayment penalty on it. If you pay it off in under 5 years, you have to pay a penalty, and sometimes a very stiff penalty.

And another downside of a DSCR loan is the larger down payment requirements as compared with traditional bank loans. Credit plays a factor in how much down payment you will be required to bring in on an investment property purchase when using a DSCR loan. For example, if you have a credit score below 650, you may be required to bring in a 25% down payment on a DSCR purchase loan.

If you have bad credit and are considering DSCR loans, make sure you understand how your credit score will affect your required down payment. Also if you have a low credit score, find out the loan amount you can get approved for if you’re planning to refinance a hard money loan with a DSCR loan.

Can a DSCR Loan be Owner Occupied?

Traditionally DSCR loans have been the go-to loans for non-owner occupied properties. However, the landscape of lending is ever-evolving.

While it’s less common, some lenders have started offering DSCR loans on properties that are only partially owner-occupied. For example a multifamily property like a four plex, whereby the owner occupies one of the units and rents out the other four units. As always, make sure to check with each individual lender, as the requirements and conditions can vary greatly among DSCR lenders.

Does DSCR include Property Taxes and Insurance?

This concept is a super important thing to understand so don’t skim over this section! When calculating your DSCR, or Debt Service Coverage Ratio, it’s essential to understand what operating expenses are factored into the calculation.

Typically, the DSCR calculation focuses on the annual Net Operating Income (NOI) of a property, which is rental revenue for the year minus operating expenses for the year. In the previous example described above, operating expenses did include property taxes and insurance.

Please note in the above example that property taxes and insurance are not included in the debt payment total. In the above example, the DSCR lender only requires principal and interest payments, the lender does NOT require insurance and taxes to be included in the monthly payments.

On the flip side, some lenders will include the taxes and insurance in the monthly payment amount. This means you will pay these expenses as part of your total monthly payment. In other words, you would pay principal, interest, a portion of property taxes for the year, and a portion of the insurance for a year as part of your monthly payment.

If a DSCR lender does require that you escrow the property taxes and insurance, make sure not to count them as operating expenses.

 

What’s the Down Payment Requirement for a DSCR loan?

As with any loan, the question of down payment is usually the first question. While the traditional amount for conventional mortgages is typically a 20% down payment, DSCR loans can have higher down payment requirements.

This is where credit score and loan size come into play. Typically the lower the credit score of the borrower, the higher the down payment requirement. And likewise, the higher the loan amount over $1 MM, the higher the down payment requirement.

For example, a borrower with a 750 credit score borrowing under $1 MM can get away with only a 20% down payment. While a borrower with a 575 credit score borrowing under $1 MM would need to bring in 35% down.

But what if you have a good credit score of 750, but you’re wanting to borrow $2 MM?
Most DSCR loans over a $2 MM loan amount, even with good credit, require a down payment of 35%. That’s a sizeable down payment if you’re not expecting it! And those with credit scores below 650 may not qualify AT ALL for a DSCR loan with a loan amount over $2 MM.

Conclusion

DSCR loans are a great tool for real estate investors to use for building their real estate portfolios over time. DSCR loans go off the income potential of the property for loan approval rather than going off of your personal income for approval.

This means you can hold multiple properties in your real estate portfolio for between 5 to 30 years using DSCR loans. However, because DSCR loans are typically slow to fund, you can get away with using a hard money loan to purchase an investment property quickly and then refinance with a DSCR loan.

And some DSCR lenders allow your credit score to be below 600, so you don’t need excellent credit to qualify. But be aware that the lower your credit score, the larger the down payment requirement on a purchase with a DSCR loan.

And on a refinance using a DSCR loan, the lower credit score you have the lower the loan amount you can qualify for. This means, you should take your credit score into consideration when looking at DSCR loans for the purchase or refinance of investment properties.

 

 

Private Money Loans: The Secret Weapon for Real Estate Investors

Navigating Your Real Estate Investment Funding Options

When you decide to invest in real estate, the burning question is, how will you get the money to purchase real estate investments?

When purchasing real estate investments, what options are out there for you to get funding? Sources of funding to purchase investment properties include: cash on hand, money from a partner, funding from a Retirement Account, a 1031 exchange, etc. These are just a few funding options for the purchase of real estate investment properties.

Most real estate investors purchase real estate investment properties using loans. The most common type of loan that real estate investors use to purchase investment properties are called private money loans, or hard money loans. A private money loan, or hard money loan, is a loan from a non-bank source. The words, private money and hard money, are words that are used interchangeably in this article to mean the same thing. There’s a debate whether hard money and private money actually have different meanings which I explain in an older article.

Most people, unless they are real estate investors, have never heard of private money loans for real estate investing. Even though these loans aren’t widely known, private money loans tend to be the top choice for real estate investors to purchase real estate investment properties.

Uncovering Your Primary Needs in Real Estate Financing

Every borrower is looking for the lowest cost funding option to purchase real estate. If you ask people what their biggest need is when it comes to funding for real estate, most will tell you it’s the lowest interest rate they can get. But most of the time, the lowest cost loan option is a bank or credit union.

The challenge with bank loans is they take a long time to close, usually between 3 weeks to 6 weeks. In a competitive real estate market where good real estate deals sell quickly, the biggest need of a real estate investor is actually the speed of funding, and not the lowest interest rate. What good is a super low interest rate from a bank if it can’t close in time for you to buy a property?

The Advantage of Private Money Loans to Meet Investor Needs

Because a real estate investor’s biggest need is usually speed of funding, most will choose private money loans to fund their real estate investment purchases. A cash offer has a higher chance of being accepted by a seller because it promises a faster closing than an offer with bank financing attached. Buyers who rely on bank financing tend to close a lot slower on a purchase, which is why sellers prefer cash offers. Only private money loans can close as fast as cash. This is the primary reason that real estate investors use private money loans to fund purchases of investment properties.

Expanding Your Real Estate Empire Swiftly with Private Money Loans

Another reason real estate investors use private money, hard money loans is because they are able to scale their real estate portfolios faster. What is a portfolio? It’s a bunch of real estate you own, like houses, apartments, warehouses, etc., that you are holding and renting out long term for rental income. If a real estate investor only uses available cash on hand and bank loans, it could take a long time to build a real estate portfolio. Here’s more detail on why hard money loans can help a real estate investor scale a real estate portfolio faster.

Some vacant properties won’t even qualify for bank financing, even if a real estate investor has excellent credit and income. Private money and hard money lenders will lend on vacant properties. This allows real estate investors to buy them, rent them out, and then resell them or hold onto them long term. This is how private money loans can help real estate investors to buy using the BRRRR method of real estate investing. 

Private Money Loans vs. Conventional Loans: Understanding the Difference

What are the primary differences between a private money loan and a conventional, bank loan?

  • A private money loan has a faster closing timeline that mimics a cash close. Private Money Loans can fund in a week or less, whereas conventional loans can take 3-6 weeks to fund.
  • Private money loans have less requirements and less paperwork needed to qualify. Often there’s no minimum credit score. Bank loans require a ton of documentation and have a minimum credit score to qualify a borrower.
  • Private lenders accept various property types to be used as collateral for a loan, whereas banks tend to be rigid on what property types they will lend on.
  • At the time this article is written, interest rates for private money loans tend to be priced in the range of 10% to 12%, whereas interest rates for bank loans tend to be below 8% for borrowers with good credit scores.
  • The loan terms of private money loans are shorter than bank loans. Usually hard money loans come with loan terms of 12-24 months. Bank loan terms, with the exception of car loans, tend to start at a minimum of 5 years to as long as 30 years

The Ease of Qualifying for a Private Money Loan for Real Estate Investment

Qualifying for a private money, hard money loan is a lot easier than qualifying for a bank loan. Why is getting a private money loan easier than getting a bank loan? Here are a few reasons:

  • There are no minimum credit score requirement with most hard money lenders, so you don’t need good credit to qualify in most cases.
  • There is no income requirement whereby you need to make a certain amount of monthly income to qualify.
  • You don’t need to have experience in real estate investing to qualify for a hard money loan on a real estate investment purchase.
  • The property you want a loan against doesn’t need to be in good shape or already rented to qualify, in fact many hard money lenders lend on properties that need repairs.

The Hunt for Private Money and Hard Money Lenders

In order to get started in real estate investing, you need to find some good hard money lenders. Find your lenders before you start looking for properties to buy. Get to know the general requirements of each lender and learn how to compare among lenders to know what lender is right for you. How fast will you need funding? Can the lender fund in that timeframe you need? It’s so important to get pre approved with at least one hard money lender before you start looking for a real estate investment property to buy.

Taking the Leap: Securing Pre approval and Starting Your Property Search

In a real estate market with a lot of competition among real estate investors, a bank loan or other conventional financing just won’t be fast enough. Private money loans tend to be the fastest loans out there when it comes to purchasing real estate investments. These types of loans have also helped real estate investors build their multimillion-dollar real estate portfolios faster than they would have done without them. If you’re serious about making real estate investments in the future, get to know your private lenders out there like us.

Private Money Loans FAQs:

What is a private money loan?

A private money loan, also known as a hard money loan, is a type of loan provided by non-bank entities. These loans are popular among real estate investors for their flexibility and quick closing times. The term, “Private Money Loan,” is often used interchangeably with the term, “Hard Money Loan,” to mean the same thing.

Why should I consider a private money loan for my real estate investment purchases?

Private money loans offer speed and reliability where traditional bank loans fall short. Private money, non-bank loans can close quickly, making them ideal for competitive real estate markets where good deals sell fast.

What are the differences between private money loans and conventional loans?

Private money loans typically have faster closing times and fewer requirements than conventional loans. However, they also tend to have higher interest rates and shorter pay back periods as compared with conventional loans.

How can private money loans help me grow my real estate portfolio?

Private money loans allow you to purchase properties that may not qualify for bank financing. This flexibility can help you add properties to your portfolio quickly and with less hassle.

What do I need to qualify for a private money loan?

Qualifying for a private money loan is often easier than qualifying for a bank loan. There are typically no minimum credit score or income requirements, and the property you want a loan against doesn’t need to be in good shape or rented to qualify.

How can I find private money lenders?

You can find private money lenders through internet searches, local real estate agents, and real estate investor groups. It’s important to establish a relationship with a lender and understand their requirements before you start looking for properties to buy.

How can I get pre-approved for a private money loan?

To get pre-approved, reach out to us at the phone number on our contact page, or submit a contact form on that page. Then one of us will reach out to you via phone, or via email, to get you pre-approved. 

Who Needs Private Money Loans? Different Borrowers, Different Reasons

Introduction: Debunking Private Money Loan Myths

There are a lot of people that mistakenly believe that private money, non bank loans are for people who can’t qualify for bank loans. They wonder why people would pay the higher interest rates that typically come with hard money loans unless they have bad credit, a past bankruptcy, a past foreclosure, or another credit problem. But there are countless reasons that people need hard money loans, and trust me, it’s not because they don’t qualify for a bank loan.

In fact, some hard money borrowers are A+ borrowers, which means they have no problem qualifying for a traditional bank loan at the lowest interest rate available. Then why do people get hard money loans?

Understanding Private Money Loans: Key Definitions

In this article, the term, ‘hard money loans,’ will be used interchangeably with the term ‘private money loans.’ But check out this article defining hard and private money loans for more explanation about these terms. Here are some of the most common uses for hard money loans; I’ll bet that some of these will surprise you.

Why Choose Hard Money Loans: the Advantages for Real Estate Investors

One of the most common uses for hard money loans is to purchase real estate similar to an “all cash” purchase. Hard money loans, often utilized for making an all-cash offer with hard money, tend to take the appearance of an all-cash offer. This is because these loans close very fast and don’t have many of the same requirements as bank loans for approval. Bank loans can take weeks or months to close, while private money loans have the advantage of closing in under a week.

And if you can purchase a property quickly, with cash or cash equivalents, you may get a better deal on the property. This is why hard money loans are crucial to the success of real estate investors. Real estate investors are able to make money in real estate and scale faster their portfolios faster because of hard money loans. View our article to  learn more about how real estate growth through hard money.

The Use of Hard Money Loans in Purchasing Distressed Properties
Business person and distressed property representing diverse private loan borrowers

Vacant properties, or even partially vacant properties, seldom qualify for traditional bank loans, even if the borrower does qualify. Properties that need tenant improvements, repairs, and those that are not generating income often do not meet the lending standards of banks. Even if a property is fixed up and rented, some banks still won’t lend on it until the property has been showing consistent rental income for a specific period of time.

This leads us to another common use of hard money loans which is to fund the purchase of distressed assets. If a property becomes distressed, it can either be sold at a discount, or the loan (note) can be sold at a discount. People who buy distressed property assets often use non bank, private money loans to purchase them.

Partner Buyout Loans: An Often Overlooked Use of Hard Money Loans

And then what about “partner buyout” loans using real estate as collateral? A partner buyout loan is where you buy out a partner’s interest in a property using a loan. Partner buyouts are another common reason people get hard money loans. Banks and other traditional lenders aren’t the type of lenders that will typically make partner buyout loans for a variety of reasons. This is a way for real estate investors to replace equity (a partner) in a property, with debt (a lender), on a property.

Divorce Settlements and Hard Money Loans: a Unique Solution

Icons representing scenarios for private loan needs

In divorce settlements, often the partner that wins the property in the divorce is required to get the other partner’s name off the title to the property. If there is an existing loan on that property, the partner that wins the property in the divorce is required to refinance the loan in order to get the partner’s name off the title to the property. And it’s not just as easy as calling the lender and getting the ex partner’s name removed from the loan. Usually it means the loan will need to be paid back in full to remove the ex partner’s name from the title.

Removing a partner from a property in a divorce using a traditional type of loan is not fast or easy. If the process takes too long, some divorce attorneys will try and force a quick sale of the property. In this situation, a type of hard money loan often called a “bridge loan,” can be used to pay off the existing loan on the property and remove the other partner from the title without being forced to sell it.

Paying Off Reverse Mortgages with Hard Money Loans

A hard money loan is a good solution to pay off a reverse mortgage when parents pass away or move out of a home. Often children will inherit a property in the event of a parents death. If the children want to keep the property rather than sell it, they will have to pay off the reverse mortgage fairly quickly in order to take title to the property. This is another common situation where a private money loan is used; to pay off a reverse mortgage on a property.

Entrepreneurs and Business Owners: an Unexpected Beneficiary of Hard Money Loans

Business owners or entrepreneurs who are seeking funds to operate, or start a new business, will often seek out private money loans against real estate assets they own. Funds can be difficult to source for business owners who need them on short notice, for example, to fulfill obligations of new contracts. Hard money loans can be taken out against the real estate assets of a business owner for short term business needs of under 12 months. In other words, a business owner can use real estate as collateral for a business purpose, hard money loan.

Gap Loans and Mezzanine Financing: Meeting Real Estate Investor Needs

And then there are real estate investors who need what’s called a “gap loan“, or “mezzanine financing.” This is a loan in a second lien, or even a third lien position on the property. This means that a real estate investor has a first mortgage loan on the property in a first position (first lien). And then on the same property, the real estate investor also gets a second mortgage loan, or second position (second lien). Gaps loans and mezzanine financing are almost always from private money sources because they are perceived as being too risky for most traditional bank lenders who only lend in a first position on a property.

Bridge Loans: Solving the New Home Purchase Dilemma

There are home buyers who want to buy a new home but they have to sell their current home first. This is because many homeowners need the down payment funds from the sale of the current home to put towards the purchase of the new home. But how do you time it just perfectly to be able to purchase a new home at exactly the same time you sell the current one? Nothing short of magic!

Home buyers in this position risk being temporarily homeless if the current home sells before they find a new home to buy. Home buyers also fear the idea of having to deeply discount their current home to sell it quickly in order to be able to purchase the new home they already identified.

The type of private money, non bank loan that is most frequently used by homeowners in this situation is referred to as a temporary bridge loan. This is a loan that acts like a bridge to connect the home buyer to a new home, while the current home is listed for sale. Using a bridge loan, home buyers are able to purchase and move into a new home, without having to discount the price on the former home for a quick sale.

Transactional Loans: a Quick Solution for Real Estate Investors

Can you imagine getting a loan and paying it back, all on the same day? Transactional loans, also called transactional financing, allow real estate investors to purchase real estate that they’ve already pre sold to someone else. In other words, they have a buyer for a property before they even purchase it. This is called a “transactional” real estate purchase, also referred to as a “double close.”

Transactional real estate deals must be able to close with all cash, or as quickly as all cash. These types of loans are almost always non bank, hard money loans because they must close so quickly, and often with very short notice. Transactional loans most commonly fund, and get paid back, all in the same 24 hour period.

Conclusion: the Versatility of Private Money Loans

There are so many other reasons why people take out hard money loans, these are just a few examples. If you’re wondering if a private money loan is the right fit for your situation, leave a question below, or reach out to us using our contact information on this site. And if you want to learn more about private money loans, please subscribe, or follow us on our online channels.

How to Use Hard Money for Seller Financing Deals

wraparound mortgageAs a hard money lender, I often get asked how to use hard money in a seller finance transaction. In this article I will explain two possible scenarios you may come across when using hard money in a seller financing deal. With the right knowledge and funding sources, using hard money in seller financing transactions can be done successfully.

Seller financing can be an attractive option for buyers and sellers of real estate alike, especially when a seller has motivation, a low interest rate mortgage, or a lot of equity. Seller financing can allow real estate investors to purchase or control real estate investments without the need to take out a traditional mortgage loan from a bank. Meanwhile, sellers benefit by getting a higher asking price and earning additional income.

But here’s the thing. Most sellers want you to bring in a down payment on a seller finance transaction. This is the part where many real estate investors don’t know how to proceed because they don’t have cash for a down payment.

Hard money loans are used by real estate investors to fund real estate purchases, so why can’t you use hard money in seller financing deals? Understanding how hard money loans work in seller finance transactions is an essential lesson for newbie real estate investors. Keep reading because I am about to give you a crash course for how to use hard money in seller financing deals.

Using Hard Money Loans in Wrap-Around Mortgage Transactions

A real estate investor offering to purchase a property from a seller may ask if the seller is willing to finance the purchase. When a seller has an existing loan on a property, the seller may offer financing through the existing loan already in place. This type of seller financing is often called a “wrap-around mortgage” because it allows a buyer to control a property while using the seller as the lender. In this scenario, the seller is able to finance the purchase for the real estate investor at a higher interest rate than the interest rate on the underlying loan on the property. This means the real estate investor is able to purchase the property without having to get a bank loan.

However, most sellers want to see a down payment from the buyer of anywhere between 5% to 20% of the purchase price. You can get a hard money loan for the down payment to the seller, however, it needs to be funded by a hard money lender that is willing to take a “junior lien” position behind the seller’s first mortgage. If you go to a hard money lender to request down payment funds on a seller financing deal with a wrap around mortgage, you will be asking for a 3rd position mortgage loan. If this is confusing for you, it will make more sense once you learn how to structure a seller financing deal with a wrap-around mortgage.

Wrap-around Mortgage Example

Let’s consider an example. You find a property listed for $300,000 that isn’t selling and it has been sitting on the market for a long time. So you approach the seller with a full price offer of $300,000, but only if the seller is able to offer seller financing. The seller has a first mortgage loan on the property and wants 10% down payment from you, or $30,000.

You don’t have the down payment of $30,000 so you will need to find a hard money lender that is willing to enter into a junior mortgage position behind the seller’s first mortgage in order to provide that 10%. This means there are three loans. The seller’s existing mortgage is in a first position and the seller’s financed loan is in a 2nd position, wrapped around the existing first mortgage. Then you have the down payment funds from your hard money lender for $30,000 in a 3rd position. This means the hard money lender is in a junior lien position, or a subordinate position to the other financing.

Many hard money lenders won’t go in a junior lien position. This makes it more of a challenge to get the down payment funds from a hard money lender on a seller financed deal with a wrap around mortgage. But there are always hard money lenders out there that will lend in a junior lien position, even though some of them won’t!

What if a Seller Does Not Have a Mortgage?

In this scenario, you approach a seller to purchase a property with seller financing and you discover that there is not a loan on the property. The seller will ask for a down payment, but you don’t have the down payment funds. You may get a hard money lender to loan you the down payment funds to give to the seller. However, the hard money lender will usually want a first mortgage position where the seller’s financing takes a junior position.

Most sellers won’t take a 2nd mortgage position behind your hard money lender, but some sellers will, if it’s a small amount. In this case you can offer your hard money lender a 1st mortgage position with the seller carrying the remainder of the financing in a 2nd mortgage position.

However, if your seller will not take a 2nd mortgage position behind your hard money lender, then you will need to find a hard money lender that is willing to go in a second position behind the seller financing loan.

Let’s consider the same example that we used before. You find a property listed for $300,000 that isn’t selling and has been sitting on the market for a long time. So you approach the seller with a full price offer of $300,000, but only if the seller is able to offer seller financing. The seller does not have a first mortgage loan on the property but the seller wants a 10% down payment from you, or $30,000, in order to seller finance the purchase.

You don’t have the down payment of $30,000, so you will need to find a hard money lender to loan you the down payment funds. You will need a seller that is willing to enter into a second mortgage position behind the hard money lender’s first mortgage. Or, you will need to find a hard money lender that is willing to go into a second mortgage position behind the seller financing. Most hard money lenders will insist on a first mortgage position so it would be easier to find a seller that is willing to go in a second position behind the hard money lender. However, if your seller is unwilling to go into a second position behind the hard money lender then you need to find a hard money lender that is willing to go into a second position behind the seller financing.

Qualifying for a Hard Money Loan

Hard money loans are considered to be much easier to qualify for than traditional bank financing. However, even hard money lenders need certain information from borrowers in order to make an informed decision. Submitting a loan to a hard money lender is easier than you may think. Check out this article where we explain how to make loan submissions to hard money lenders to get a yes or no answer quickly.

Negotiating Terms on Hard Money Loans

When applying for a hard money loan, it’s important to be aware that there may be room to negotiate the terms of the loan. While traditional banks often have inflexible terms, hard money lenders tend to be more flexible on the terms of the loan. This includes flexibility on interest rates, fees, and extension options.

Potential Pitfalls of Seller Finance Transactions

Seller finance transactions can provide buyers a way to purchase properties without having to obtain loans to do so. However, it’s important to be aware of the potential pitfalls involved with such transactions. These risks include: the seller may be behind on loan payments, the seller may have liens on the property, or there may be a divorce in process that is not disclosed by the seller.

Legal Aspects of Seller Finance Transactions

When engaging in a seller finance transaction, both the buyer and seller should be aware of the legal implications. This includes understanding the rights and responsibilities associated with each party, as well as any potential liabilities that might arise during the course of the loan. Each state has its own set of laws and regulations regarding seller finance transactions, it’s important to familiarize yourself with the rules in your jurisdiction before entering into any agreement. This includes information on things like maximum loan amounts, required disclosures, and licensing requirements.

An experienced real estate attorney can provide guidance and help ensure that everyone involved is protected by creating a solid, legal contract. Whatever money you spend on a good real estate attorney is worth every penny to make sure you are getting into a good deal, with a binding contract, that won’t come back to bite you!

Structuring Financing to Meet Your Needs

When financing a seller financed purchase with a hard money loan, it’s important to carefully consider the terms of the loan in order to structure the financing in a way that meets your needs. This includes understanding what types of loans are available, as well as the repayment terms and interest rates associated with each option. It’s also important to consider any potential tax implications of taking out a loan.

Conclusion

Seller financing can allow real estate investors to purchase investment properties without the need to take out traditional bank loans. Getting access to a down payment in a seller financing transaction should not deter a real estate investor from engaging in these deals. If you understand how to use hard money loans correctly to source a down payment, you can make a seller financing deal work for all parties involved.

 

 

How to Submit a Hard Money Loan: Tips for Real Estate Investors

Submitting a hard money loan can feel like an intimidating task for real estate investors looking for funding. But if you know how to submit a hard money loan, it’s easy! This blog post will give you the necessary insight on how to effectively submit a hard money loan that will increase your chances of approval and help you get the funding you want.

Using a basic loan summary to submit hard money loans to your lenders is key to successful loan submissions. By following these steps that I outline in this article, you’ll receive the best possible outcome and get funded fast.

To submit a loan to a hard money lender to get a yes or no answer quickly, you need a loan summary and photos. If the property is a fix and flip, you’ll also need your comparables to support your after repair value and an estimated rehab budget.

Here’s your cheat sheet, check this out! Below is a basic “loan summary” and it includes all of the information that a private money, hard money lender will need to give you a yes or no answer. Lenders are busy, and so are you, so use this form to give them a snapshot of the loan, to see if it fits in their parameters.

The below loan summary includes the most important details about the property and the deal that you need funding for such as property address, property description, property value, etc. When a private money, hard money lender gets this loan summary from you, you are going to get his/her attention and you’ll definitely get a yes or no answer quickly. Providing a loan summary to your lender also shows that you’re organized and on top of your game.

What is the most common mistake that borrowers make when submitting hard money loans? It’s so simple that you’ll be surprised to hear that it’s just….property photos! Yes, people almost always forget to send property photos when they are submitting a loan to a private money, hard money lender for approval. Even if you have just one, front, exterior photo, send it to your lender along with this loan summary. The more photos the better!

Keep this tool in your toolbox because you’re going to need it if you want to get funding fast from a private money, hard money lender. And if you have any other questions about loan submissions to hard money lenders, leave them in the comments below.


Property Address: This is the physical address of the property that the loan will be used for.

Property Classification/Type (Residential or Commercial?): This is the classification of the property, whether it’s a residential or commercial property.

Property Description: IF RESIDENTIAL: # of beds/# of baths/sq footage, lot size, garage? Year built? This provides details about the property such as the number of bedrooms and bathrooms, square footage, lot size, garage, and the year it was built.

Property Description: IF COMMERCIAL: How many buildings? Total bldg. sq. footage, acreage, year built. This provides details about the commercial property such as the number of buildings, total building square footage, acreage, and the year it was built.

IF PURCHASE: List purchase price or offer price: If the loan is for a purchase, this will list the purchase price or the offer price for the property.

IF A REFINANCE: List amount of debt to be paid off with new loan requested: If the loan is for a refinance, this will list the amount of debt that the borrower wants to pay off with the new loan.

IF A REFINANCE: Amount of loan fees/ interest reserves requested in addition to base loan amount: If the loan is for a refinance, this will list the additional loan fees or interest reserves requested in addition to the base loan amount.

IF REFINANCE: When purchased? For how much? This will list when the property was purchased and for how much it was purchased.

List amount of repairs or rehab: This will list the amount of money that will be used for repairs or rehab on the property.

Property Value: (based on?) This will list the value of the property, based on an appraisal or other valuation method.

Current lien(s) if not applicable please put, n/a: This will list any current liens on the property, if applicable.

Loan Term Requested (How long do you need a loan for?): This will indicate the length of time that the borrower needs the loan for.

Exit Strategy (How do you plan to pay the loan off?): This will list the borrower’s plan for paying off the loan, such as through refinancing or selling the property.

Use of funds: (Please provide brief breakdown of the loan needs): This will provide a brief breakdown of how the loan proceeds will be used, such as for purchase, repairs, or refinancing.

How soon needed by: (Is there a contract date we should know about?) This will indicate the date by which the funds are needed, such as if there is a contract date to close on a property purchase.

Don’t Risk It! Make Sure You Have the Right Insurance for Your Investment Property

Did you know that real estate investors tend to be the most underinsured group of property owners? This truth is hard to believe considering most real estate investors are putting their life savings into their investment properties. In fact, insurance is one of the things that real estate investors tend to cheap out on the most! Stick around for a bit because I’m going to outline some of the biggest insurance risks to help you understand what type of investment property insurance you probably need.

Insuring your investment properties is one of the best ways to mitigate risk in real estate investing. But that starts with making sure sure you have the right insurance for your investment properties. You need property insurance to not only protect yourself, but if you have a loan on your property, it also protects your lender. It doesn’t matter if you have a hard money loan or traditional mortgage, as you will responsible for loss

There are different types of insurance to consider when you own an investment property, and for many people, it’s overwhelming. In order to protect an investment property from loss, you’ll need to have coverage for things like fire, theft, and vandalism.

You’ll also want to be sure that you’re protected in the event of an accident on your property or from natural disasters such as earthquakes, floods, tornados, and wildfires. And then what about the loss of use of the property while it is being rebuilt or repaired?

We are not a licensed insurance agency, so please consult with a licensed insurance agent when purchasing insurance policies. But as a private money lender, we often find that the property insurance is the least known area by real estate investors who are usually the borrowers of our loans.

Because a lender is essentially a borrower’s debt partner on a property, it is important that the borrower have the right type of coverage because a potential loss will impact the lender as well. Here we explain some of the most commons types of insurance coverage that our borrowers need to protect their investment properties.

Make Sure You Have Enough Dwelling Replacement Coverage!

One of the most important aspect of any insurance policy is the amount of coverage needed to rebuild the property in the event of a total loss. For most residential policies, the dwelling replacement coverage is the dollar amount that will be available to rebuild the property.

Because the cost of construction is never fixed but is always fluctuating, property owners must revisit this dollar amount frequently to make sure they have adequate coverage or coverage limits are not exceeded. Particularly if building supplies and labor costs are increasing year after year, your coverage may need to be increased slightly every year. Some insurance policies have guaranteed replacement coverage which takes into account inflation of construction costs.

Liability coverage Insurance

Why would you need liability coverage? What if someone gets hurt on your property and sues you? The liability coverage amount listed on your insurance policy is the dollar amount the insurance company will pay if someone is injured on your property. Always make sure your insurance policies have a high dollar amount of liability coverage for renters and other people that enter the property premises. An accident could happen on your property that could cause injury or death to another person and this is why every real estate investor should take liability insurance very seriously! Liability costs will vary depending on the amount of coverage you need. Personal liability policies are also available that cover all of your properties.

Builder’s Risk Insurance

Builder’s risk is a type of insurance coverage that you can obtain on an investment property that is under renovation or construction. If you are building an investment property from the ground-up, or if you are renovating an investment property, builder’s risk insurance may be a type of insurance that you should look into. Builder’s Risk Insurance can be purchased by a property owner, or can be held in the name of the general contractor who is doing the construction work on the property.

Theft Insurance & Vandalism Insurance

Thieves often target vacant properties under construction, so it’s important to have theft insurance coverage if you have a vacant property under construction. Theft insurance is a type coverage that falls under a builder’s risk policy. But if you don’t have a builder’s risk policy, make sure your insurance coverage will protect you from loss if your building materials, tools, equipment, or appliances are stolen.

Vandalism insurance covers the premises and personal property from intentional damage caused by a third party. Builder’s risk policies usually cover vandalism but if you don’t have a builder’s risk policy, just make sure the policy you have covers vandalism. A broken window, tagging/graffiti, exterior property damage from eggs being thrown at the exterior of the property, are just a few examples of vandalism damage.

Vacant or Unoccupied or Property Insurance

If your property is vacant for longer than 30 days you should look into a vacant or an unoccupied insurance policy. What’s the difference between the two types of policies? If your home has personal belongings in it but it is not occupied for longer than 30 days it is considered “unoccupied.” When there are no personal belongings in it and it is empty for longer than 30 days it is considered “vacant.”

When a property is vacant or unoccupied for extended periods, it is considered higher risk, so the premiums for this type of insurance are a higher cost. Particularly in areas with high crime, it’s important to have vacant and unoccupied insurance for any properties that will be vacant for extended periods to protect it against vandalism or theft. Because vacant property insurance is more expensive than rental property insurance, property owners sometimes declare a vacant property as being tenant occupied to save money on insurance costs. Don’t do it!

Never say a property is occupied by a tenant when it is actually vacant in order to save money an insurance policy premium. This is because an insurer may not pay an insurance claim if the true occupancy status of the property is not declared. The good news is that you can have different types of insurance for the different stages of your property’s life. For example, you may need vacant dwelling coverage for your investment property while the property is under renovation for the first six months. Once the property is rented, you can change the insurance to a landlord/tenant policy (rental property insurance).

Landlord and Rental Property Insurance on an investment property

Rental property insurance or landlord insurance on an investment property is important for 3 important reasons.

First, it protects your investment in the event of damages caused by tenants, such as a fire or water damage.

Second, it protects your income if a tenant skips out on rent payments.

And, finally, rental insurance can help protect you from liability and cover medical costs in the event that someone is injured while on your property.

For these 3 reasons, it’s important to have rental insurance on any property you own that is rented to tenants. And your insurance won’t cover your tenants’ personal affects such as furniture, bikes, etc., so make sure your tenants are aware of this and if they are concerned they should purchase their own rental insurance or landlord policy coverage.

Loss of Use Coverage

Loss of Use Coverage is critical for tenant occupied rental properties. This type of insurance coverage will pay if your tenants are unable to occupy the property due to a loss. Sometimes loss of use coverage will put your rental property tenant in temporary housing or a hotel if the property is uninhabitable. This could possibly cover rental income as well. Loss of use coverage usually comes standard with most insurance policies, but be sure that it is a stated coverage on your specific policy.

Fortunately, there are ways that real estate investors can protect themselves from suffering too much financial hardship due to loss of use. One option is obtaining loss of use insurance, which helps to cover expenses related to lost income during such periods. This type of coverage is typically included with landlord insurance policies and can help minimize potential losses due to having a vacant rental property.

Fire Insurance

Fire insurance is a standard coverage found on most insurance policies. Fire insurance covers the cost to rebuild or restore a property that has been damaged or destroyed by a fire. It also covers the replacement of personal property that has been damaged or lost due to a fire. And fire insurance coverage will also cover costs associated with the loss of the use of a property while it’s being repaired or rebuilt.

For example, if your tenants are displaced from a property after a fire, your insurance coverage ought to reimburse you for loss of rents and cover the cost of relocating your tenants temporarily. Because investment properties with tenants are treated differently than owner occupied properties, make sure your fire insurance coverage will cover all of the potential losses associated with a fire.

Wildfire Insurance

In recent years, we’ve seen an increase in wildfires and, as a result, the demand for wildfire insurance has also gone up. If your investment property is located in an area where it has exposure to wildfires, wildfire insurance is specifically designed to insure property owners from damage to their properties caused by wildfires.

If you already own one, or you are considering purchasing an investment property in the western United States, be sure to ask your insurance agent about wildfire insurance. It could be the difference between losing your investment and keeping it safe and protected.

Earthquake Insurance for your Investment Property

If you’re an investor with a property located on or near an active earthquake fault line, it’s important to make sure you have adequate insurance coverage. One thing that most people don’t know is that earthquake insurance is not covered under most hazard or homeowners insurance policies. This is because it is a speciality insurance coverage that will cover the cost of rebuilding your property if it is destroyed by an earthquake or suffers structural damage. It will also cover other structures on your property, such as driveways, garages, warehouses, and small storage buildings.

For example, the Wasatch Fault in Utah represents one of the biggest earthquake risks in the interior of the western U.S. In 2020, a magnitude 5.7 earthquake in a suburb of Salt Lake City, caused over $60 million dollars in property damage. For property owners without specific earthquake coverage, this meant the potential for a total loss! Because many people have their life savings tied up into their investment real estate, a total loss from an earthquake would be utterly devastating. That’s why it’s important to make sure you have adequate coverage in place before an earthquake strikes. As a private money lender, it is important to us that our borrowers have earthquake insurance coverage on any property we lend on that is located on, or near, an active fault.

If you own a property in an area that is prone to earthquakes, earthquake insurance will cover the cost of repairing or rebuilding that property if it is damaged by an earthquake. It will also cover the cost of temporary living expenses if you need to relocate while your property is being repaired. Make sure your policy has a low replacement deductible and enough dwelling replacement coverage to rebuild the property in the event of a total loss from an earthquake.

Flood Insurance for your investment property

Because flood plain maps are always changing, a property currently located in low flood risk area may be at increased risk of flooding in the future. This means the risk profile for a certain location may change over time with regard to flooding and flood zone classification. Flood insurance will cover the cost of repairing or rebuilding your property if it is damaged by a flood.

If you’ve owned a property for a long time that is located in an area with potential for increased risk of flooding, it is important to assess this risk every few years. This type of risk is something that a property owner needs to assess frequently with the help of a licensed insurance agent.

And, even if you do have flood insurance, it’s important to make sure you have enough coverage to rebuild your property should it be damaged by a flood.

Windstorm Insurance, Tornado, and Hurricane Insurance for your investment home

Windstorm insurance is insurance that protects investors from damage to their investment properties caused by gales, winds, hail, and other gusty hazards. When big winds harm roofs and windows, rain and debris can also damage the personal belongings inside a property. Ensure that your windstorm insurance policy covers physical damage to the property and possessions inside the home. Also, make sure you have the right amount of coverage in place to protect yourself from potential losses!

In some states, insurance for tornados, cyclones, and hurricanes require you to purchase a special policy which is typically more expensive. This type of coverage is something you really need to discuss with a licensed insurance agent that specializes in issuing coverage for properties in areas that are prone to destructive storms.

Conclusion

Real estate investors tend to be underinsured as compared to typical homeowners. Many real estate investors either skimp out on insurance, or just don’t get the right type of coverage. If you are a real estate investor, get the maximum amount of insurance coverage that you can qualify for your investment properties. You local insurance agent will  know what insurance products you will need and explain any policy limits.   Depending on the location of your properties, you may require different types of insurance for each location.

As a private money lender, we see real estate investors making the same mistakes when it comes to insuring their investment properties. Don’t let that be you! Find a qualified insurance agent that understands how to insure your properties right. Finding the right insurance agent to issue the right type of insurance coverage could mean the difference between making a good investment or having a total loss of your life savings.

How to Buy a BRRRR With a Hard Money Loan

What does BRRRR mean?
Use Hard Money to buy a BRRRR

“Buy, Rehab, Rent, Refinance, Repeat,” is a new initialism to describe a classic, real estate investment strategy. Savvy real estate investors have been employing this investment strategy for a very long time, so the concept of BRRRR is nothing new or innovative. But its importance to building a real estate portfolio cannot be understated.

When done correctly, a BRRRR can be an excellent way to build wealth over time from your real estate portfolio. In this article, we’ll explore why funding for a BRRRR is the fastest and easiest when funded with a hard money loan. We will also consider some pitfalls that should be avoided when funding a BRRRR purchase with hard money loans.

To cover the basics super quick here, the initialism, BRRRR, is a method that is described as follows:

Buy: Identify the property you want to purchase and buy it using a hard money loan.

Rehab: Renovate the property as needed .

Rent: Get the property rented.

Refinance: Refinance the hard money loan used for the purchase with a long-term, 30-year mortgage. By refinancing the current loan with a lower interest rate loan, called a “cash-out refinance,” you can take out a slightly larger loan against the property than what is currently owed to the hard money lender. These “cash-out” proceeds from the cash-out refinance loan serve as the down payment used to buy another rental property using a hard money loan.

Repeat: Do it all over again so you can buy more rental properties to add to your real estate portfolio.

Why Buy a BRRRR with Hard Money?

It can be difficult to find a bank loan if you don’t have experience with a BRRRR, in fact, most traditional mortgage companies are unfamiliar with BRRRRs. Using a hard money loan to buy a BRRRR can be a great way to get started in the world of real estate investing if you don’t have the credit, or if you don’t have experience. Many hard money lenders will lend to borrowers with bad credit, some do not require income documentation, and still others will lend to real estate investors with no experience. With a hard money loan, you still may need to bring in a solid downpayment in most cases.

Another challenge that people face is getting a bank loan quick enough to be able to purchase the property. Particularly in a competitive market with lots of investor buyers, a bank loan can be too slow to compete with cash offers. In a sellers market for example, realtors are usually very selective about who they work with and won’t consider offers that are not cash offers.

A hard money lender can get you pre-approved to buy investment properties in advance of making any offers. Because hard money funding is so fast, it is similar to an all cash offer.

How to buy a BRRRR with Hard Money

When it comes to buying a BRRRR investment property with hard money, there are a few things you need to keep in mind. It’s important to note that, even though a hard money lender may not care about poor credit, not everyone will be approved for a loan. Make sure you know what the lender’s requirements are, and make sure you meet those requirements, before you apply. For example, some lenders will require prior real estate investing experience, while other lenders will lend to beginners. Understanding the various requirements of different hard money lenders will help you decide which ones you should pursue for a loan.

Shopping Around for a Lender

There are many, different hard money lenders out there that you can go to for financing, but it’s important to do your research first. Make sure you know which lenders are real and reputable first, by searching for every piece of information you can find about the lenders online and reading each of their online reviews. There are a lot of loan scams in which fake lenders pose as real lenders, just to scam you out of money.

If you can, get recommendations from other people in your target market who have successfully purchased BRRRRs using hard money loans. Make sure you search the lender’s name on search engines, check on sites like Ripoffreport.com and the BBB website, and look for “real” online reviews (it’s pretty easy to spot the fake ones). And then make sure you are comparing “apples to apples” when comparing among hard money lenders. For example, how fast can a lender fund and a lender’s appraisal requirements are two considerations when comparing among hard money lenders.

Providing Documentation
Hard money lenders differ greatly on what type of documentation each will require in order to fund your deal. Some lenders have almost no documentation, while others require a lot of documentation to get a loan. Do your research and make sure you know what the lender is looking for before you apply. This will make it easier, and much faster, to get the funding you need to purchase a BRRRR property.

What the Lender is Looking for
Lenders want to know that the property you are buying is in a desirable area where potential tenants want to live. All lenders prefer experienced borrowers, but that doesn’t mean that lenders won’t make loans to beginners.

And then there’s the property value. Because the property is the lender’s collateral for the loan, value is a very important consideration for a lender. Is the property worth what you’re paying? Or will you have to increase rents in order to achieve the property valuation you will need to do your refinance?

Many banks require a seasoning period, which is a period of time you must own a property before you can refinance your hard money loan with a long term mortgage. After the seasoning period ends banks require an appraisal to be performed and will only lend you a certain percentage of the appraised value. This is another reason why the property value is such an important consideration for both you and your hard money lender.

And, what if you don’t have a lot of cash to purchase a property? Despite the popular myth that you don’t need your own money to get started in real estate investing, yes, most lenders will require you to bring some money to the table. Even rehab lenders will still want you to show that you have enough liquidity to cover some of the repairs, or at a minimum, show you have enough cash to cover carrying costs.

How much cash does a lender require from a borrower? Some rehab lenders will require minimum borrower cash of 10-20% down of the total project cost if the property needs rehab. While many other lenders will only loan you a percentage of the purchase price for the property, usually between 70% to 90% of the purchase price.

Loan Denial for a BRRRR Purchase

In some instances, your loan might be denied by a hard money lender for one or more of the following reasons:

  1. They don’t like the deal for whatever reason.
  2. The home might be in a bad location, it may be priced too high, it may require too much work, or maybe the numbers just don’t add up.
  3. You don’t have enough experience, a solid plan, or enough money.

The Advantages of Buying a BRRRR with a Hard Money Loan

The Ease of the Application Process
Many hard money lenders make applying for a loan very easy. For example, our application process for BRRRR properties consists of a one-page form to fill out. Once we have the one-page form and a few photos of the property we can give you a yes or no answer on your loan request. And because hard money loans are primarily asset-based loans, these loans require far less documentation than a bank loan.

The Fast Turnaround Time on Funding
In competitive markets where good rental properties are in short supply, you need a lender who can fund quickly. This is probably one of the biggest advantages of buying a BRRRR with a hard money loan, which is fast funding. Look for smaller, lending companies because they can typically fund a loan much quicker than larger companies with high loan volume.

Many hard money lenders will use a local broker’s price opinion to determine property value rather than using an appraisal. Because appraisals can often increase the time it takes to close on a property, this is another advantage of using a hard money lender to fund your BRRRR purchase.

Low Cost to Borrow Short-Term
Interest rates can vary from 8- 12% and the rate depends on the lender. As compared with bank loans, these rates seem really high. But if you’re planning to keep the hard money loan in place for a short time until you refinance, this can be your lowest cost financing.

For example, say you purchase a BRRRR using a hard money loan with a 12% annual interest rate. You keep the hard money loan for 5 months and then you refinance into a 30-year loan with a much lower rate. In this example, the hard money loan only costs you 5%, not 12%. This is a small price to pay as compared with the cost of taking on a partner, or the drama that can come from borrowing money from family or friends.

The Disadvantages of Buying a BRRRR with Hard Money

There are far more advantages to using hard money than there are disadvantages. However, there are two important disadvantages that you should be aware of when buying a BRRRR with hard money.

Excessive Junk Fees
All lenders have junk fees associated with funding the loan, and these fees are different from loan fees, or points. Some hard money lenders have excessive junk fees, so make sure you are aware of all of the fees associated with the loan. Especially when selecting one lender over another, use the total fees as a tool for comparison among various lenders. One lender may have a lower interest rate than another, but his junk fees may be higher as compared with a lender with a higher rate and no junk fees.

Not Everyone Will be Quickly Approved for a Refinance Loan
One thing to be aware of when using a hard money loan to purchase a BRRRR is that not everyone will easily qualify for the refinance. This means you may hold the hard money loan longer than you anticipated. Because hard money loans are far easier to qualify for than bank loans, some real estate investors are confronted with a challenge when refinancing. Someone may not be able to refinance because of a low credit score, while others may not qualify from a DSCR perspective.

For example, if the price paid for the property is very high but the rental income is not high enough to cover the mortgage payment on the refinance. A real estate investor may be betting on future appreciation of property value and is willing to take a loss on annual rents. But banks like to see the rental income is enough to cover the mortgage payment, taxes, and insurance. If the rental income doesn’t cover all of these expenses, a bank will look at your personal income to cover the loss. If your personal debt to income ratio is high you may have trouble qualifying for the bank refinance.

If you are unable to refinance quickly, this could leave you stuck paying a higher interest rate on a hard money loan for much longer than you expected. In the worst case, you may need to sell the property if you are unable to refinance out of the hard money loan you used to purchase it.

Prepayment Penalties
Some lenders require that you keep the loan for a minimum period of time before you pay it off. Always ask your lender if there is a prepayment penalty on the loan, sometimes this is called a guaranteed interest period. If there is a prepayment penalty, it is usually the sum of the interest from the day you pay off the loan through the lock out date. Some hard money lenders want a minimum of a three month loan term, while some want a minimum of six months.

You’re Approved for a BRRRR from a lender. What’s next?

Once you’ve found a hard money lender that has approved your purchase of a BRRRR property, then what’s next?

-Plan Your Exit Strategy: Make sure you qualify for the refinance to take out your hard money lender. What is the seasoning requirement of your take-out lender? Will the property value be high enough to pay off the loan and cash out for your next purchase? Does your rental income cover your loan payment, taxes, and insurance?

-Start Looking for Properties: Once you’re approved by your hard money lender and you’re 100% certain you can qualify for the refinance, it’s time to start looking for properties. Make sure the properties you are looking at will meet your hard money lender’s requirements. Really understand the property value, look at market comps, look at market rents, make sure you’re not overpaying for the property. And don’t make assumptions about rents, make sure your projections are accurate. And then finally, make sure your projected rents will cover the loan payment on your hard money loan.

Build Wealth Faster with BRRRR Properties
When done correctly, a BRRRR can be an excellent way to build wealth over time from your real estate portfolio. Using a hard money loan to buy a BRRRR can be a great way to get started in real estate investing if you don’t have the credit, or if you don’t have any experience. And by using hard money loans to acquire BRRRR properties, you can scale your real estate portfolio faster, and as a result, you will build your wealth faster.

If you’re looking for a BRRRR loan, reach out to us to discuss your financing options.

 

Insurance for Investment Properties: Get it Right!

This is THE MOST forgotten about thing for real estate investors.

You would think that insuring a property would be the most important thing real estate investors do but it’s usually the last thing they think about.

Don’t wait until the last minute before you’re closing on a property to consider the insurance.

Here are some tips for making sure your property is insured properly

  1. Get the right type of insurance for your specific investment property., e.g. vacant dwelling versus landlord/tenant
  2. Dwelling Replacement Coverage: Don’t cheap out, make sure your coverage is adequate. If the cost to build the home new in your market is $250 per square foot, make sure you insure your property at $250 per square foot. If there’s a loss you won’t be able to rebuild the property because the dwelling replacement coverage is not enough to rebuild the property.
  3. Rehab? Make sure your policy has builder’s risk and liability to protect your improvements and protect you from liability if someone is hurt on the job site.
  4. Addtl Coverage: Is your area prone to flooding or earthquakes and does your insurance policy cover those?

This is your life savings in most cases that you’re putting into these properties. If anything your properties should be OVERinsured and not underinsured.

Don’t fall short on your insurance!