If you’re a Utah real estate investor evaluating hard money, you already know rates feel steep on paper. But when you run the actual numbers — not the annualized ones — the math often tells a very different story. This guide breaks down 2026 hard money loan rates in Utah, what drives them up or down, and exact deal math so you can make a clear-eyed decision before your next closing. New to the concept? Start with our Hard Money 101 guide first.
The Annualized Rate Myth
The number that makes most investors flinch is 12%. But hard money is not a 30-year mortgage — so quoting it annually is misleading.
Hard money lenders aren’t running a black-box algorithm. Your rate is shaped by a handful of real-world risk factors:
LTV Ratio — The single biggest lever. Lower LTV = lower rate. See exactly what we look at in our loan approval process.
Property Condition — A light cosmetic flip gets better terms than a gut rehab.
Rehab Scope — Structural work, major systems, or ADUs carry more risk. Our fix and flip loan program is built specifically for these scenarios.
Location — SLIC suburbs (Salt Lake, Lehi, Ipswich Corridor) are easy to underwrite. Mountain towns and raw land sit at the expensive end of the range.
Borrower Track Record — Repeat investors who’ve paid back cleanly often see 0.5–1 point knocked off. Browse our recent loans closed to see the kinds of deals we fund.
True Cost Comparison: Hard Money vs. Conventional vs. DSCR
Feature
Hard Money
Conventional
DSCR
Interest Rate
10–12%
7–8%
7.5–9%
Close Speed
5–7 days ✓
30–45 days
21–30 days
Income Docs Required
None ✓
Full W-2 / Tax Returns ✗
Rent Roll / DSCR ✗
Distressed Properties
Yes ✓
No ✗
No ✗
Appraisal Required
No ✓
Yes ✗
Yes ✗
Best For
Fast flips, distressed buys
Primary & stabilized rentals
Cash-flowing rentals
Real Deal Math: Salt Lake City Fix & Flip
Let’s run the numbers on a real Rose Park deal so you can see exactly what hard money financing costs — and what you walk away with.
📍 Rose Park, Salt Lake City — Fix & Flip Case Study
Purchase Price
$280,000
Rehab Budget
$70,000
Total Capital Deployed
$350,000
After Repair Value (ARV)
$475,000
Hard Money Rate
12% / 6-month hold
Origination Points
2 points
Total Financing Cost
$26,600
💰 Net Profit
$98,400
$26,600 in financing costs generated a $98,400 net profit. That’s a 370%+ return on the cost of capital. The real question isn’t “is 12% expensive?” — it’s “what does the deal actually pencil to?” See more real deals we’ve closed across Utah just like this one.
Fees to Watch For
The interest rate is only half the story. Fees can quietly add thousands to your cost of capital — or, if you’re with the right lender, they can be refreshingly minimal.
Fee Type
Typical Utah Range
Private Money Utah
🚩 Red Flag
Origination
2–3 pts
1–2 pts
Under 1 pt (hidden costs elsewhere)
Prepayment Penalty
3–6 months minimum interest
None ✓
Over 6 months minimum interest
Junk / Admin Fees
$400 – $1,995
$230 ✓
Multiple stacked fees >$3,000
⚠️ Watch Out: Junk Fee Stacking
Some lenders advertise low rates but layer on document fees, underwriting fees, wire fees, and “admin charges” that quietly hit $3,000–$5,000. Always ask for a full fee sheet before you commit — any lender who won’t provide one is a red flag.
When Does Hard Money Work — And When Doesn’t It?
✅ Hard Money WORKS
❌ Hard Money Does NOT Work
You need to close in <2 weeks
Deal margins are too thin to absorb financing costs
Property is distressed / not lendable by conventional lenders
You’re buying a stabilized rental to hold long-term (a bridge loan → DSCR refi may be better)
You’re self-employed with non-traditional income docs
You expect to carry the loan longer than 12–18 months
You need certainty of close to beat cash buyers
💬 Corey’s Take
“Stop asking what the rate is. Start asking what the return on cost of capital is. A 12% hard money loan that closes a $100k profit deal is infinitely better than a 7% conventional loan that takes 45 days and kills the deal entirely.”
Q: How do I calculate the actual cost of a hard money loan?
Take your annual rate, divide by 12 to get the monthly cost, multiply by how many months you’ll hold the loan, then add your origination points. That total is your true cost of capital — not the annualized rate printed at the top of the term sheet.
Q: What LTV can I get on a Utah hard money loan?
Most Utah hard money lenders cap at 65–75% LTV on the as-is value. With rehab draws included, you’re aiming for no more than 70% of after-repair value (ARV). Our fix-and-flip loans go up to 75% LTV in most Utah markets.
Q: Does Private Money Utah charge prepayment penalties?
No. You can pay off the loan early with zero prepayment penalty. If your rehab wraps up in month 4 instead of month 6 — you only pay interest for 4 months.
Q: What property types qualify for hard money in Utah?
Single-family, 2–4 units, small commercial, and mixed-use all qualify. We also fund some raw land and new construction scenarios. Our residential rehab loan covers most flips; larger commercial projects may benefit from our commercial bridge loan. Browse the full FAQ page for more details.
Ready to Run the Numbers on Your Deal?
Get a free, no-obligation rate quote from Private Money Utah. Most investors have numbers back within hours — not days.
You found a property. It’s a good deal. Maybe even a great deal. But the bank? They’re playing games with you, aren’t they? Welcome to 2025, where traditional lenders have basically told real estate investors to take a hike.
I’m Corey Dutton, a Utah private money lender with Private Money Utah and High West Lending. I’ve been in the hard money loan game in Utah long enough to see every excuse banks throw at real estate investors for not approving their loans. Here’s the straight truth about why traditional financing is broken, and how hard money loans can actually get you where you need to go.
Why Banks Are Killing Your Real Estate Deals Right Now
Let me be blunt – banks don’t want to lend to real estate investors anymore. Period. Here’s why:
Interest Rates Are Still Higher:
At the time this article is being written, the prime rate is 7.25%. And the interest rate matters whether you’re flipping houses, or buying rentals in the Utah market. When interest rates were below 5%, buyers were able to qualify to purchase a fix and flip easier and Utah rental rates were able to qualify for DSCR and conventional loans. But as soon as the prime rate hit 8.5%, it was harder to turn Utah fix and flip properties and harder to make rents cover the monthly loan payment on a DSCR or conventional loan.
Apartment complex owners that purchased multifamily properties in Utah between 2020 and 2022 using hard money loans also discovered it was difficult to refinance with a long term DSCR loan or conventional loan once rates went up in the second half of 2022. The rental income was simply not high enough to support the new loan payment at the higher interest rates.
They Want REALLY large down payments: In the past, banks often asked for a 10-20% down payment on an investment property purchase in Utah, but now, banks are demanding 25-30% down on investment property purchases in Utah. Compare that to the 3-5% they want for your primary residence. For real estate investors in Utah, coming up with that large of a down payment is proving difficult.
The Approval Process Takes Forever: I’ve seen deals die while Utah real estate investors wait months – yes months – for bank approval. In the Utah real estate market, if you can’t close in 2 weeks, you’re not getting a good deal on a property. Simple as that.
They Don’t Understand Real Estate Investing: Try explaining a BRRRR strategy to your local bank loan officer. I’ll wait. They want to lend to W-2 employees buying cookie-cutter houses, they don’t want to lend to Utah entrepreneurs who are building wealth through real estate.
Commercial Lending Has Basically Stopped: Banks are rejecting 43% of commercial loan applications in Utah at the time this article is written. That’s not selective lending – that’s fear.
Hard Money Lenders in Utah: Your Real Solution
Here’s what hard money actually is, without the fancy marketing speak:
It’s a short-term loan secured by the property itself. The lender cares more about the property value than your credit score. It’s fast, it’s flexible, and yes, it costs more upfront.
Why Hard Money Loans Work in 2025:
Speed: 5-10 day loan close, not 5-10 weeks!
Asset-Based: We care about the property’s value, not your tax returns or credit score.
Flexibility: We can structure loans that make sense for your specific project or need.
Bridge Financing: Perfect for flips, rehabs, rentals, or short term loans for owner occupied purchases to get you to permanent financing.
The History of Hard Money Loans that Banks Don’t Want You to Know
Hard money loans aren’t some sketchy, “back-alley” financing for desperate people. This concept goes back thousands of years – lending against real assets. During the Great Depression, when banks failed left and right, private money lenders kept the economy moving. Hard money loans get their name “hard money” from the words, “hard asset” which means any asset that can be sold quickly, such as real estate.
After 2008, when banks pulled back due to new regulations, private money lenders stepped up again. We were one of the lenders that were lending to real estate investors after 2008 to help them buy foreclosures in Utah and all over the U.S. That’s how we got started and today, we continue to lend to real estate investors to buy all sorts of properties in Utah, Colorado, Idaho, Wyoming, Montana, Nevada, and other states in the Western U.S.
Let’s Address the Elephant in the Room- Hard Money Interest Rates
Yes, hard money loans cost more than bank loans. Usually 10-12% annually. But here’s what most people miss:
Time is Money: While you’re waiting 60 days for bank approval, that Utah property gets sold to someone else with cash, or with a hard money loan lined up. What’s the cost of losing that deal?
Short-Term Tool: These aren’t 30-year mortgages. Hard money loans are 6 months to 1 year. You’re paying for speed and easy loan qualification.
Your Property is the Collateral for the Loan: If your income is spotty, or your credit history is not so great, Utah hard money lenders qualify you primarily based on the property and the down payment. Tax returns are rarely requested, and credit is rarely pulled by Utah hard money lenders.
Do Your Homework: Not all hard money lenders that lend in Utah are created equal. Work with licensed, local, and reputable lenders – not some out-of-state lender that promises the lowest interest rate. Never choose a hard money lender based on interest rate and fees, look for the most responsive and qualified lender first.
Where The Hard Money Lending Industry is Heading
Technology is changing everything, and hard money is no exception:
AI and Data: We can analyze deals and approve loans faster than ever using AI and other applications at our fingertips.
Online Approvals: You can apply for a loan with us, get approved, and manage your loan from your phone! It’s 2025, not 1985. We use all forms of technology to make getting and funding your loan easy.
Real Talk: Is Hard Money Right for You?
Hard money loans work best if you:
Need to close on a loan fast.
Have a clear plan for how you’ll pay back the hard money loan in less than 12 months time.
Understand the costs upfront.
Are using real estate as the collateral for the loan. Most hard money lenders don’t offer business loans unless real estate is the collateral for the loan.
Want flexibility in loan structure, like your credit took a hit recently, or your income has been hit or miss.
Hard money loans are NOT the right fit if you:
Don’t have any time constraints and can shop around at different banks and credit unions for the lowest interest rate.
Are looking for a business loan, or personal loan, and you don’t have real estate as collateral.
Don’t have a solid plan to pay the hard money loan back in a short period of time like 6-12 months.
Are looking for a long-term loan, such as a 30-year loan.
The Bottom Line for Utah Real Estate Investors
Banks have made it clear they don’t want Utah real estate investors as customers. Fine. We’ve built a hard money lending company in Utah around serving the Utah real estate investors they’ve abandoned.
Is hard money more expensive upfront? Yes. But when you factor in speed, flexibility, and actually being able to close deals, it often pencils out better than waiting weeks for a bank to “maybe.”
At Private Money Utah and High West Lending, we’ve helped thousands of real estate investors in Utah close deals that banks wouldn’t touch. We’re not here to replace your long-term financing strategy – we’re here to help you execute it.
Ready to stop playing games with banks and start closing real estate deals? Let’s talk. Because while you’re reading this, someone else is using hard money to buy the property in Utah that you’re still trying to get bank approval for.
Corey Dutton is the founder of Private Money Utah, a hard money lending company serving real estate investors throughout Utah. With over 17 years of experience in real estate and private money lending, Corey has helped fund millions in real estate transactions across the state.
Utah Mortgage Brokers: Close More Deals in 2025 with Hard Money Loans (Full Guide)
Introduction
With the national home price reaching an all time high in 2024, many real estate gurus believe prices are too high. This has made home affordability much worse. And then, national home sales hit a nearly 30 year low in 2024, which resulted in a small number of purchase loan applications.
And then, traditional lenders tightened their lending criteria in 2024, causing delays, rejections, and cancelled real estate transactions. Many mortgage industry insiders do not expect lending to loosen up in 2025 either, given the uncertainty at the start of 2025 around inflation and long term interest rates.
The above factors have contributed to a very low number of mortgage loans being closed. If you’re a Utah mortgage broker, you’ve likely experienced the frustration first-hand. Bridge loans, a type of hard money loan, have emerged as a solution to rescue some of the transactions cancelled by the tightened lending standards. Mortgage brokers who have built strategic partnerships with reliable hard money lenders can:
Offer a fast closing loan product that helps their borrowers compete with cash buyers on new purchases
Transition clients to a long-term loan and make additional commission
This 2025 guide will show you how Utah mortgage brokers can leverage Utah hard money lenders to close more loans, and diversify their client base by offering additional loan options.
Why Utah Mortgage Brokers Should Partner with Utah Hard Money Lenders
1. Overcome the Cash-Buyer Hurdle
Problem:
Some cities in Utah (like Salt Lake City, Park City,Provo, and St. George) see a large percentage of cash offers. Because traditional loans can sometimes take 45–60 days, this can put home buyers at a disadvantage
Solution:
Hard money loans typically close within 7–14 days, similar to all cash transactions to give buyers a competitive advantage. In fact, on purchases, lower price offers can be accepted by sellers more readily. When your client can present an offer to purchase a property similar to all cash, it becomes far more attractive to the seller to accept a lower priced offer.
2. Offer More Than Just Home Loans
Not every borrower is looking for a home to buy, some borrowers are buying investment properties such as rental properties, fix and flips, and land. And what about bridge loans for home relocations or home renovations?
The cookie-cutter DSCR loans that every mortgage company offers almost always require appraisals. However, hard money bridge loans don’t require appraisals and have way less requirements than a DSCR loan or similar non QM loan. This is why hard money bridge loans can close in under a week.
If you’re a broker without a hard money relationship, you might be missing out on a lot of different types of borrowers. Hard money loans cater to a wide variety of property types. This can expand the client pool for mortgage brokers.
3. Earn More Through Refinances
Because hard money loans are short-term, usually 3 to 12 months, that usually means your borrowers will need long-term financing to replace or “take out” their hard money loans. Enter you again as the mortgage broker.
4. Strengthen Your Referral Relationships
A mortgage broker can more confidently network with realtors and other professionals who may need fast closing loans from time to time. Many of the busiest, Utah real estate agents frequently have tight deadlines, or their clients may have problems getting financing. Happy referral sources tend to give you more word-of-mouth referrals.
Here’s How Hard Money Loans Can Help Your Borrowers
Less Requirements for Funding
DSCR and non QM loans tend to require an excessive amount of documentation. Hard money lenders have way less documentation requirements because loan approval is based on down payment or equity, the property value, and a borrower’s planned exit strategy.
Low Credit Scores Ok
Even if your borrower’s credit score doesn’t meet most standards, a hard money lender usually doesn’t have a minimum credit score.
Rehab Loans & Fix-and-Flip Financing
In areas like Provo, Salt Lake City, and in Ogden, Utah there is a lot of older housing built before the 1980s. These homes in Utah need to be updated to a modern standard, or repairs are needed. Borrowers who buy these homes to rehab and resell are often called fix and flip investors. Hard money loans can be used to purchase and rehab dated properties that are later resold for a profit.
3 Steps to Building Your List of Hard Money Lenders in Utah
Step 1: Identify and Vet Your Local Utah based Hard Money Lenders
Start Local: Find hard money lenders that are based in Utah who have local knowledge. Search online for the term, “Hard money lender Utah,” or ask other colleagues for their recommendations.
Check Their Track Record: Verify the lenders can actually close in the timeframe they say they can close. Do they require appraisals? If so, they may not be able to close as quickly as they claim. See if there are any online reviews about them to verify this, or talk to people that have closed loans with them before.
Confirm Fees & Terms: Every Utah hard money lender has different terms, so make sure you know each lender’s interest rates, fees, and loan terms.
Ask These Types of Questions:
Do you work with brokers?
In how many days can you close on a loan?
Do you require appraisals?
What are your typical interest rates and fees?
What is the most typical length of loan term? e.g. 6 months or 12 months?
Step 2: Help Your Buyers Make Competitive Offers
Proof of Funds
Hard money lenders can provide a “proof of funds” letter showing your client’s ability to close quickly.
Remove Appraisal & Financing Contingencies
Hard money lenders may not require an appraisal. And in many cases, a financing contingency is not necessary in the contract either.
This can be a huge advantage in multiple-offer scenarios to allow your clients to make “cash-like” offers.
Transition to Long-Term Financing
Once the purchase is completed, you step back in and refinance the borrower into a long-term, 30 year loan.
Common Myths Around Hard Money
Myth 1: Hard Money Loans Are Too Expensive to Recommend
Reality:
Short-Term Loan Duration: If the borrower only keeps the loan for 3–4 months, they pay interest only for that period. For example is the annual interest rate on the hard money loan is 10%, and your client only keeps the loan for 3 months, the client will pay 2.5% – not 10%.
Time Is Money: Your clients may actually save money on the purchase price of a property if they can make a cash-like offer. Or maybe the home itself has an intangible value to your clients, and closing on it quickly is a top priority. That type of benefit can often outweigh the higher cost of a hard money loan.
Myth 2: Hard Money Loans are for Bad Credit Borrowers
Reality:
Plenty of high credit borrowers use hard money loans when time is of the essence, or if something minor is preventing them from qualifying for a conventional loan.
Utah Case Studies: Hard Money Loans in the Real World
Case Study 1: Transforming a Dead Loan into Closed in Provo, Utah
Situation: A mortgage broker in Provo, Utah had a client with good income and excellent credit history. The client was buying a new construction home and had put down $50,000 as a deposit with the builder. However, the lender wanted the client to file another tax return before he would be able to qualify for a conventional loan. The lender declined the client at the last minute, putting the client at risk for losing his large deposit.
Action: This Provo mortgage broker called a Utah hard money lender, Private Money Utah. The lender funded the purchase in 7 days. The client did not lose his earnest money and was able to move into the home upon completion.
Result: After filing another year of tax returns per the original lender’s requirement, the mortgage broker refinanced the client into a 30-year loan within 6 months.
Case Study 2: Saving a St. George, UT Deal at the Last Minute
Situation: Buyer’s conventional loan fell apart two weeks before closing.
Action: The broker introduced a hard money option. The lender approved the buyer in 48 hours, and closed the next week. Both sides, buyer and seller, were relieved.
Result: Transaction saved. A few months later, the broker refinanced the buyer into a lower-rate, long-term loan.
Case Study 3: A Relocation Bridge Loan in Salt Lake City
Situation: A family needed to move into a new home but had all their equity tied up in their current residence.
Action: The mortgage broker coordinated a “bridge” hard money loan, allowing the purchase before selling the old house.
Result: The family closed quickly on the new home, vacated the old one (making it easier to sell), then refinanced the short-term loan into a 30-year mortgage.
Your 2025 Action Plan: Grow Your Mortgage Business with Hard Money
Keep their contact info handy for any deal that shows time-sensitive or nontraditional financing needs.
Educate Clients from Day One
Present hard money as a complement to your standard mortgages—especially when speed or unique property issues arise.
Position yourself as a full-service broker who can solve almost any financing challenge.
Secure the Refinance
Once a deal closes using hard money, follow up with your client on the timeline for converting to long-term financing.
This ensures ongoing client satisfaction and a second source of income from the same borrower.
Spread the Word
Let local realtors, attorneys, and investors know you have a fast-close solution ready.
Build a reputation for getting hard or complicated deals done—boosting word-of-mouth referrals.
Call to Action (CTA)
Ready to expand your mortgage business by partnering with reliable Utah hard money lenders?
Call our team at 435-565-1768 to learn about forming a productive, long-term relationship.
Hard Money Guide for Utah Realtors in 2025
Introduction
In 2024, nearly a third of all homes nationwide were purchased with all cash. In Utah, cash buyers closed on approximately 20% of Utah’s homes. That remaining 80% of Utah home buyers closed with some sort of financing.
But that 80% of closed sales that relied on financing were very hard won, I mean, ask any Utah realtor, and they will agree! Banks and other lenders really tightened up lending in 2024, using every excuse not to lend, and to even the most qualified of buyers.
The result? Frustrating delays, endless conditions, and a long, drawn out closing process for both buyers and sellers. In 2024, transactions with financing contingencies killed a lot of deals and made many Utah realtors nearly lose their minds! But there’s a game-changing solution most realtors simply don’t know about, and it’s hard money loans.
Unlike traditional loans, hard money loans have less funding conditions and a much shorter closing timeline of 7 to 10 days instead of 45 to 60 days. For Utah realtors, hard money loans could be a way to rescue stalled out transactions or to outbid cash buyers.
But also, hard money loans allow realtors to be able to remove the financing contingency that kills almost every deal: the sale of a buyer’s current home.
In this 2025 Utah Realtor’s Guide to Hard Money Loans, you’ll learn:
How to use hard money loans to win a bidding war
Facts to educate buyers/sellers on these loans
How to remove financing contingencies to make stronger offers
3 local case studies with proven results
A step-by-step playbook to partner with lenders
Why Utah Realtors Can’t Afford Not to Know About Hard Money Loans
1. The Cash Buyer Problem
A large percentage of Utah listings receive cash offers.
Traditional loans take 45-60 days to close; cash buyers seal deals in an average of 14 days.
The Solution: Hard money loans allow your buyers to act like cash buyers. How?
Hard Money Loans remove both appraisal and financing contingencies from the offers made on homes.
Example: A Salt Lake City, Utah realtor closed a $850,000 home in 16 days using a hard money loan. The due diligence period was 14 days, and it closed 2 days later. The realtor’s offer beat 4 other offers with various contingencies. How’s that for closing fast with no hassle?
2. Making Competitive Offers that Get Accepted
Problem: No Room for Negotiation: Why do realtors struggle submitting offers that are ‘below asking’ for their clients with contingencies such as financing?
No incentive for sellers to take a lower price
There’s a high probability offers will be rejected
Solution: Hard money lenders can close in under a week, which gives sellers an incentive to accept a lower price than asking price.
Case Study: Tom and Janice had been looking for a home in Utah for awhile, when one suddenly came up in their price range. They had been preapproved with a local hard money lender for a bridge loan to purchase a home. When this home popped onto the market, Tom and Janice’s realtor made a “cash-like” offer with no contingencies. The realtor submitted the offer with a proof of funds letter from the local hard money lender. The seller accepted the offer and they closed on the property in 14 days.
Hard Money Loans for Properties that Need Rehab
Utah has a lot of old, outdated housing stock: Many homebuyers don’t want to purchase a home that needs repairs or updating because of the cost involved. There are FHA loans available for purchase and renovation of outdated homes, also called 203(k) loans. A lot of realtors know about this FHA loan program, but the problem with the 203(k) loan is that it can take as long as 2 months to close! Many sellers won’t give a buyer that much time to close. Not to mention, all of the restrictions, and special conditions of the 203(k) loan program. But there are some local, Utah hard money lenders who offer rehab loans which have way less requirements as compared to the 203(k) loan, and they can close quickly, usually in 2 weeks or less.
Utah Markets with Outdated Home Inventory:
Ogden, UT: Because the Ogden, Utah market has a lot of homes built prior to the 1980’s, there are a lot of opportunities to buy a home that needs fixing up.
Provo, UT: There is a lot of outdated housing stock in Provo, Utah. Many homes were built before 1970, a lot of older homes were converted into student housing, or have been purchased by young families as first time homebuyers.
Midvale, UT: This fast growing submarket of Salt Lake City is full of 1930-1950 bungalows and 1970’s split levels, all of which desperately needed updating.
Solution: Some Utah hard money lenders will cover up to 80% of the total project cost (purchase + rehab) to help Utah home buyers to purchase and rehab outdated Utah homes. These loans close faster (in a quarter of the time in most cases) as compared to the well-known 203(k) loans. For example, a hard money rehab loan can close in under 2 weeks, whereas the 203(k) loan can take 8 weeks. Once the renovation is completed, buyers can refinance with a long-term, 30-year mortgage.
3 Steps to Find a Utah Hard Money Lender to Work With Your Clients
Step 1: Use Local Lenders Who Understand Utah’s Market
Ask around to other realtors and mortgage brokers to see if they know any Utah-based hard money lenders. Or do a google search for “hard money lender Utah” and find a company that is based in Utah that offers hard money loans. And remember, not all hard money lenders are created equal. Ask these questions:
Question
Why It Matters
“Are you local to Utah”
Local expertise typically means that no appraisal will be required.
“What’s your fastest closing timeframe?”
Utah-based hard money lenders can close a lot faster than out-of-state lenders. But each lender is different, so always ask this question!
“What is the average interest rate you charge and total fees as a percentage of the loan amount?”
Get a ballpark of the hard money loan terms offered by each lender so you aren’t shocked when a lender quotes the interest rate or fees to your clients.
Red Flags to Avoid:
Out-of-state lenders who say they can close in under 10 days, but who also require appraisals for loan approval.
Utah hard money lenders who quote extremely high interest rates and fees, but then also demand really large size down payments.
Vague answers about fees or timelines for closing.
No reviews from Utah borrowers.
Pro Tip: Ask other realtors and mortgage people who they use for hard money in Utah. Attend local real estate investor meetings such as the Salt Lake Real Estate Investors Association (SLREIA) monthly meeting to network with real estate professionals who are already working with hard money lenders in Utah.
Step 2: Educate Your Clients About How Hard Money Loans Work
Most buyers/sellers don’t understand how hard money loans work. Use these short scripts to guide them:
For Buyers:
“If traditional financing is not available, or if it falls through, we know lenders who can fund loans in under 7 days. Let’s discuss a backup option.”
For Sellers:
“Some buyers utilize hard money loans. These loans can close quickly, similar to all cash.”
For Hesitant Investors:
“Hard money loans let you leverage the property’s after-repair value (ARV) and can fund some of the renovations. That way you can update the property and sell for a higher price for a profit. For example, if a home’s ARV is $500,000, you could borrow up to $350,000 to fund purchase and renovations. And then, resell the home for a profit!”
Step 3: How to Submit Offers Using a Hard Money Loan on a Purchase
Use a Tool called a “Proof of Funds Letter” with your offer
Speed is your competitive edge when submitting offers to sellers. Use a proof of funds letter to submit with your offers to show sellers that your buyer already has private financing in place. This allows your buyer to close as soon as the due diligence period ends, so no contingency for appraisal or financing are required.
How to Write an Offer on a Purchase Using Hard Money
Indicate in the offer you are using a hard money loan
Remove Contingencies: Private money loans operate similar to all cash, this means there are no contingencies other than buyer due diligence. Most hard money lenders do not require appraisals, so there’s no appraisal deadline to write into a contract. And since the private money loan is essentially pre-approved, there is no financing contingency to write into on offer either! By removing those 2 contingencies from the offer, you have a better chance of getting an offer accepted.
Share compelling statement with Sellers: When submitting your offer, tell the seller’s agent or the seller the following:
“We work with lenders who can close in 14 days or less.”
Debunking 2 Common Hard Money Myths
Myth 1: “Hard Money Loans Are Too Expensive”
Reality: Most hard money loans are interest only loans. That means if you only keep the loan for 4 months, you only pay interest for the time you need the loan. For example, if the interest rate is 12%, and you keep the loan for 4 months, you pay 4%, not 12%.
Myth 2: “Only Bad Credit Borrowers Use Hard Money Loans”
Reality: People most often use hard money loans because they have a need for speed in closing on a transaction, or for another short-term need such as a partner buy out, a divorce settlement, etc. It’s not because someone has bad credit that they seek out hard money loans!
Example: A husband and wife owned a commercial building jointly. As part of their divorce settlement, the husband agreed to buy out the wife from the property by giving her a specific cash out amount. He was also obligated to refinance the mortgage on the property that was in both of their names. The husband got a hard money loan to pay off the mortgage and cash out the wife, in exchange for the wife transferring full ownership of the property to the husband. Once the husband bought out his wife, he went to his local bank and applied for a long-term, commercial loan, such as a 20-year mortgage. Within 3 months, he paid off the hard money loan with a 20-year commercial mortgage.
Utah Case Studies: Realtors Who Closed More Transactions Using Hard Money
Case Study 1: From 0 to 6 Deals in 12 Months (Provo, Utah Realtor)
Challenge: A Provo, Utah realtor was losing listings to cash buyers due to the highly competitive market.
Solution: The realtor met a hard money lender who explained to her how she could close in 14 days or less, “I can close as soon as your client’s due diligence deadline ends.”This lender did not require an appraisal but instead used a Broker’s Price Opinion of Value.
Results:
This realtor won 3 bidding wars on 3 properties and got 3 other properties under contract by submitting “cash-like” offers using hard money.
Case Study 2: Rescuing a St. George Buyer With Hard Money
Challenge: A bank denied a St. George, Utah buyer at the last minute for a minor reason. The seller stood to lose 4 weeks in the process of closing with this buyer that suddenly lost his financing.
Solution: The hard money lender approved the buyer within 48 hours and closed in under a week, saving the transaction.
Case Study 3: Salt Lake City Relocation Loan
Challenge: A growing family had outgrown their current home and needed to buy a larger home in the Salt Lake City, Utah market. But all of their down payment was locked up in their current home. So they first needed to sell the current home, before they could qualify to buy a larger home.
Solution: The realtor knew a Utah hard money lender that could see the family had a lot of equity locked up in their current home.
Result:
The hard money lender approved the family for a type of hard money loan called a “bridge loan for relocation.” The hard money lender did a loan on the new home purchase, and a loan on the current home behind the first mortgage.
The family purchased the new home and moved into it, vacating their current home which made it sell faster. Once their old home sold, the family paid off the balance of the hard money loan that was leftover with a 30-year mortgage at a lower interest rate.
Your 2024 Action Plan
Reach out to 2-3 Local, Utah Hard Money Lenders: Vet them using the questions above. Add their contact information to your phone. Reach out to them frequently with potential transactions to see they are a fit for hard money.
Educate your Buyers and Sellers:
Educate your buyers and sellers on how hard money loans can facilitate various transactions to close faster, and with less hassle, as compared to traditional financing.
CTA: Ready to close more transactions this year? Contact usor call someone on our team to get to know us as one of your preferred, Utah hard money lenders. Reach out to us at, 435-565-1768.
Transforming a Home with a Hard Money Loan in Utah: Maria’s First Fix and Flip
Have you ever wondered how to make a profit by turning an outdated home into a stunning, modern home? First you need the right loan, specifically a hard money loan from a hard money lender in Utah. In this post, I’ll tell you a story of a first time real estate investor, Maria, who took advantage of one of our rehab loans for fixing and flipping a property in West Jordan, Utah.
The Before: An Outdated Home in Need of Transformation
When Maria first laid eyes on this house located in West Jordan, Utah she saw potential. The house was outdated, featuring wallpaper borders, old carpet, dated fixtures, and drab bathrooms. But Maria’s contractor friend confirmed quickly that this home was structurally sound and had no major systems problems. The home just needed to be cosmetically updated, which meant replacing dated flooring, cabinets, and fixtures in an effort to modernize the home rather than making any major repairs.
Traditional banks were not an option for Maria in this case because she was required to purchase the property in under 10 days. Because she had to complete the property purchase quickly, Maria started to look for a hard money loan. Partnering with a reputable hard money lender in Utah can make all the difference in any Utah real estate venture.
Unlike conventional loans, hard money loans offer quick approval and tend to be asset-based, focusing more on the property’s future value rather than the borrower’s credit score or income. A hard money loan allowed Maria to purchase the property swiftly and then begin the renovations.
Why Utah Is a Hotspot for Real Estate Investors
Before diving into Maria’s first fix and flip project, let’s explore why Utah has become a magnet for real estate investors, especially those interested in fix and flip projects.
1. Rapid Population Growth
Utah is one of the fastest-growing states, with a population that has been steadily increasing over the past decade. This growth fuels housing demand, making it an ideal market for real estate investors looking to buy, renovate, and resell housing.
2. Strong Economy and Employment Opportunities
The state’s robust economy, bolstered by industries like technology, healthcare, and education, attracts a steady influx of new residents. A thriving job market means more potential buyers looking for new or renovated housing.
3. Family-Friendly
Utah has excellent schools, world class parks and recreational opportunities, and a community and family focused culture, making it attractive for those who want to raise a family.
4. High Return on Investment (ROI) Potential
With the right property and renovations, real estate investors can achieve a significant ROI. The high demand for updated homes creates a profitable environment for fix and flip projects in Utah.
The Transformation: From Outdated to Outstanding
Armed with a hard money loan from a Utah lender, Maria embarked on an ambitious road to renovate this outdated home.
Modernizing the Interior
Living Room Makeover
The living room underwent a dramatic transformation. Old carpeting was replaced with hardwood floors, the wallpaper borders were removed and painted in neutral tones to create a warm, inviting space. And the centerpiece became a stunning fireplace with a contemporary design, completely modernizing the main living area.
Kitchen Upgrade
The cramped, outdated kitchen was expanded and modernized with:
Stainless Steel Appliances
Quartz Countertops
Modern Backsplash
All new Cabinetry
Gold Hardware and Lighting
Bathroom Renovations
Bathrooms were updated with modern vanities, countertops, fixtures, tiled floors and showers, and contemporary lighting. The master bathroom received a nice makeover with a walk-in shower and a soaking tub, adding a touch of luxury.
Expanding the Living Space
Finished Basement
One of the most significant changes was the conversion of the unfinished basement into a fully functional living area. This major improvement provided:
Extra bedrooms
A new living space for a family member or the potential for a rental apartment
Hard money loans in Utah often include renovation costs, enabling Maria to undertake such extensive improvements. In this case, we did a rehab loan to provide Maria with the funds needed to renovate the home.
Enhancing the Exterior
Curb Appeal
The home’s exterior was refreshed with:
New paint
Updated windows and doors
Modern light fixtures
These changes significantly improved the property’s curb appeal, crucial for attracting buyers.
Outdoor Living Space
A new deck for entertaining
New landscaping
Outdoor enhancements are highly valued in Utah’s family-oriented market.
The Role of Hard Money Loans in Maria’s Success
Maria’s ability to act quickly and renovate the Utah property was made possible by her hard money rehab loan. Here’s how this loan helped with Maria’s home project success.
Quick Approval and Funding
Traditional bank loans can take weeks, sometimes months, to fund, but hard money loans can typically fund in under 1 week. The speed of closing the purchase loan allowed Maria to purchase the property by her deadline on the contract.
Flexible Requirements for Funding
With a focus on the property’s future, or after repair value rather than on borrower’s income or credit, hard money loans make it possible to fund the purchase and rehab of a property without a mountain of paperwork. This aspect of hard money loans is particularly beneficial for real estate investors who may not meet traditional loan requirements.
Watch the video on Marias Flip
Why Choose a Hard Money Lender in Utah for Your Fix and Flip Projects
Partnering with a local hard money lender in Utah offers several advantages:
Expertise in the Utah Market
Local lenders understand the nuances of the Utah real estate market, including the unique characteristics of the suburb where this property is located in West Jordan, Utah.
Strong Professional Networks
Local lenders often have connections with reliable real estate agents, contractors, home stagers, accountants, insurance providers and other professionals who can support the success of a Utah real estate investor.
The Numbers in a Fix and Flip
Here are the major numbers to factor into a fix and flip real estate project:
Financial Breakdown:
Purchase Price
Renovation Costs
Realtor Commissions on the Resale
Interest and Fees on the Hard Money Loan
Insurance, property taxes, utilities
Net Profit: the final return on investment after repaying the loan and covering all expenses.
Utah’s Ongoing Appeal for Real Estate Investors
Maria’s real estate project is just one example of the opportunities available in Utah for real estate investing. The state’s growth trajectory and demand for updated homes make it a promising location for real estate investment.
Tips for Investors
Market Research: Stay informed about local trends and property values.
Build a Reliable Team: Collaborate with trusted professionals that know their stuff!
Get Fast Funding: Opt for hard money lenders in Utah to ensure quick funding.
Focus on High-ROI Renovations: Prioritize improvements that will most impact the future property value. Don’t spend money on things that won’t move the needle to get you the max resale price.
Conclusion: Transform Your Real Estate Investment Dreams into Reality
Turning an outdated property into a dream home is not easy, but it can be done with the right resources and determination. Maria’s success demonstrates how getting a hard money loan in Utah to fix and flip a property can produce a profitable outcome.
If you’re considering trying a fix and flip, we are one of the most trusted, Utah Hard Money Lenders out there.
Ready to start your fix and flip project in Utah?
Contact us today to get preapproved for a hard money loan for a fix and flip or another type of property. Whatever you’re getting into out there, we can help fund your next real estate deal. We have help hundreds of people like Maria to turn their real estate investment aspirations into success stories.
Frequently Asked Questions
Q: What is a hard money loan?
A: A hard money loan is a short-term, asset-based loan used primarily by real estate investors. It’s secured by real estate and focuses primarily on property value rather than the borrower’s credit score or income.
Q: Why choose a hard money loan over a traditional bank loan?
A: Hard money loans offer faster approval and funding, flexible terms, and are ideal for properties that may not qualify for traditional financing due to their poor condition.
Q: How quickly can I get a hard money loan in Utah?
A: Approval and funding of our hard money loans in Utah can occur in under a week, allowing Utah real estate investors to act swiftly on opportunities.
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.
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
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
Rental Income Evaluation: DSCR loans look at the property’s income potential more than the investor’s personal finances.
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.
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.
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:
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) ]
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 ]
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 loansbecause 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 buyusing 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 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 onour 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?
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
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
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.
