Insurance for Investment Properties: Get it Right!
This is THE MOST forgotten about thing for real estate investors.
You would think that insuring a property would be the most important thing real estate investors do but it’s usually the last thing they think about.
Don’t wait until the last minute before you’re closing on a property to consider the insurance.
Here are some tips for making sure your property is insured properly
Get the right type of insurance for your specific investment property., e.g. vacant dwelling versus landlord/tenant
Dwelling Replacement Coverage: Don’t cheap out, make sure your coverage is adequate. If the cost to build the home new in your market is $250 per square foot, make sure you insure your property at $250 per square foot. If there’s a loss you won’t be able to rebuild the property because the dwelling replacement coverage is not enough to rebuild the property.
Rehab? Make sure your policy has builder’s risk and liability to protect your improvements and protect you from liability if someone is hurt on the job site.
Addtl Coverage: Is your area prone to flooding or earthquakes and does your insurance policy cover those?
This is your life savings in most cases that you’re putting into these properties. If anything your properties should be OVERinsured and not underinsured.
Don’t fall short on your insurance!
Hard Money Loan Prepayment Penalties: What You Don’t Know!
Anytime you’re getting a hard money loan, whether you’re purchasing a property, or refinancing to a lower rate, early payment penalties could cost you. For example, let’s say you have recently refinanced a property but there’s a chance you may sell that property within 12 months of getting the loan. Things happen in life that are not always planned, such as a sudden job transfer to another city, an unexpected divorce, etc.
The bottom line: if you sell a property unexpectedly and pay a loan off early, you may have to pay a steep penalty for doing so. This early payment penalty is called a Prepayment Penalty, sometimes referred to as “PPP,” or a “Prepay.”
What is a Prepayment Penalty
A prepayment penalty? is simply a penalty for paying off a loan early. Many hard money loans, including 30 year mortgages, have prepayment penalties so this is something that all loan borrowers should pay attention to and fully understand.
How Do You Calculate the Prepayment Penalty on a hard money loan?
And what if your hard money loan does have a prepayment penalty, how do you calculate it? A prepayment penalty is equal to the accrued interest from the loan pay off date through the end of the prepayment period.
For example, let’s say your loan has a prepayment period of 3 years. This means if you pay the loan off after 3 years there’s no penalty, but if you pay the loan off prior to 3 years you pay a penalty. In order to calculate the penalty, you will need to know the loan payoff date. If you pay the loan off after 2 years, you will owe 1 year of interest as a penalty. (3 years – 2 years = 1 year). As I said before, the penalty is equal to the interest that accrues from date of payoff to the end of the prepayment period. In this example, you will owe one year of interest as a penalty.
Still confused? Let’s try another example. In the second example, let’s say your prepayment period is 365 days and you pay the loan off in 180 days. This means you will owe the interest from day 180 to day 365 as the penalty, or 185 days of interest (365 – 180 = 185).
Why do Prepayment Penalties for Hard Money Loans Exist?
Prepayment penalties exist because many private and hard money lenders need to make a minimum amount of interest when making a loan. This is because of the high opportunity cost involved for a lender in the commitment to make a loan.
Are Prepayment Penalties Always a Bad Thing?
Sometimes hard money lenders will offer a lower interest rate, or lower fees, on a loan with a prepayment penalty. For example, if you are fairly certain you won’t pay a loan off early, you may be able to lock in a lower interest rate on a loan with a prepayment penalty. If a loan comes with no prepayment penalty, you should ask the lender if there is an option for a loan with a prepayment penalty. Why? Because a loan with a prepayment penalty may come with a lower interest rate, or lower fees.
How Do Hard Money Loan Prepayment Penalties Work?
Because hard money loans tend to be short-term loans primarily used by real estate investors, the prepayment period is usually much shorter than with traditional, long term loans. For example, a hard money loan might have a prepayment period of 90 to 120 days, while a traditional loan might have a prepayment period of 1 to 3 years.
Most real estate investors are using hard money loans to acquire new properties, or for short term, cash out refinances. Because most real estate investors need hard money loans for between 6 to 9 months, they are not so concerned with 90 to 120 day prepayment penalties. Some exceptions are real estate investors who are using hard money loans for short term “fix and flips,” or for fast acquisitions that will be refinanced in 30 to 60 days. If a real estate investor really only needs a hard money loan for 30 to 60 days, it’s important to ask the hard money lender if the loan has a prepayment penalty.
In conclusion, a prepayment penalty is simply a penalty for paying your hard money loan off early.
Anytime you are getting a loan, whether it’s for the purchase of a property, or if you’re refinancing a property that you already own, make sure you always ask if the loan comes with a a prepayment penalty. If you have a sudden life change and pay a loan off earlier than expected, you may have to pay a high penalty for doing so.
Let us know if you have any questions about hard money loans!
Four Investment Property Types to Buy With Hard Money
If you’re looking for a way to get into real estate investing, hard money loans may be a good option for you to fund your purchases. With hard money loans, you can purchase all different types of investment properties. In this article, I will go over the main investment property types that we commonly lend on. These include multi family properties, commercial buildings, fix and flips, and Single Tenant BRRRR properties. Each investment property type has its own unique benefits and risks. In this article, we’ll take a closer look at each one.
Multi Family Properties
Any structure that has multiple, individual dwelling units, is known as a multi-family property. Examples of a multi family investment property include a duplex or an apartment complex, just to name a few.
Duplexes, threeplexes, and fourplexes are different types of multi family properties with a smaller number of units for investors who want to get their feet wet in multi family. These properties usually have two, three, or four units, respectively, so only a small number of units to manage and maintain.
When you get a hard money, private money loan to purchase multi family properties, lenders will often require a slightly larger down payment than on a residential, single unit purchase.
Apartment complexes are a subtype of multi family property with a larger number of units, usually 5 or more units. Although more units translates to more rental income, apartment complexes require more repairs and maintenance, and thus often demand that their owners have more cash reserves.
Multi Family properties are located in both rural and urban areas and can provide a steady stream of income for a real estate investor (if purchased at the right price and managed properly). One of the benefits of investing in multi family property, is that you can get multiple rents coming in from different units. If one of the tenants does not pay rent, or if there is a vacancy, you may still have rental income from the other tenant(s). This lowers your risk as compared with renting a single unit property.
Some hard money lenders prefer multi family property loans over single tenant property loans because multiple units means more tenants paying rent if there is a vacancy, or if one of the tenants doesn’t pay rent. When lending to buyers of multi family properties, hard money lenders usually want to make sure their borrowers have prior experience owning rental real estate.
This is because rental real estate tends to come with more ownership headaches, and particularly with a multi family property with a larger number of units. Also with multi family you need cash reserves for maintenance because multiple units means multiple repairs and improvements that may be necessary after purchase.
A hard money lender may be expecting you to bring in a larger down payment and show more cash reserves for the purchase of a multi family property than in the purchase of a single unit dwelling. Also, if you plan to manage the property yourself you will need to plan on spending time collecting rents and doing groundskeeping. This is one of the reasons that some hard money lenders may want to see experience, to know that you have a plan for how these things will be managed.
Commercial buildings can be a great investment for those looking for stable returns with longer term leases. There are many different types of commercial buildings, the most common include:
One of the main benefits of commercial buildings is that they have historically provided a good hedge for inflation and a reliable income stream, often with higher yields than residential real estate. Urban, retail buildings often lease to niche tenants with established businesses in prime locations. Leases with these kinds of tenants are usually longer term and more likely to renew.
Some building types perform better than others in certain locations, and this is usually based on supply and demand in the area. Another risk associated with commercial buildings is that they can be hard to sell quickly, or can be trickier to finance, particularly single tenant commercial buildings.
Fix and Flip Properties
A fix and flip is a type of investment property where the investor purchases a property, makes repairs or renovations and then sells it for a profit. This can be a great way to make money in the real estate market, but it does come with some risks.
Some of these risks are
Increased competition in your resale price range
Being underfunded in the deal, e.g. having less money than is needed to complete the remodel, not being able to make payments on the loan used to purchase the property, etc.
The remodel takes longer than expected or the property takes longer to sell than expected. Either way the project takes way longer than expected.
There are many hard money, private money lenders that lend on fix and flip properties. Loans for fix and flips are often called “rehab loans.” Some lenders will provide money for repairs but the borrowers are always expected to bring in some of their own cash.
There is a lot of competition for fix and flip properties, for this reason, you need to be able to close quickly when the right deal comes along. Get preapproved with a private lender prior to looking for properties. Here are 6 things that you’ll need to provide to a hard money lender to close on a property quickly.
BRRRR is an initialism that means “buy, rehab, rent, refinance, repeat.” This type of investment is similar to a fix and flip investment property, but instead of selling the property after making repairs or renovations, the investor keeps the property and rents it out.
BRRRR properties most commonly are single unit properties such as a single family home or a townhome. Rental properties can provide a steady income stream and may appreciate over time. Many private money, hard money lenders will approve this type of property for purchase based on the asset characteristics with no minimum credit score, no experience, etc.
If you purchase a BRRRR property using a private money, hard money loan, make sure you’re covered on the “refinance” part of the BRRRR, e.g. make sure you qualify for 30 year mortgage to pay off the private money used for the acquisition of the property. Read more on how to purchase BRRRR properties using private money loans
This article has focused on 4 types of investment properties that you can purchase using private money loans. But there are so many other investment property types that real estate investors purchase using private money, hard money loans including raw land, residential development, new construction, to name a few.
Purchasing an investment property does require upfront research, due diligence, and an understanding of the real estate market in the area where the property is located. You will need some cash reserves to cover ongoing repairs and maintenance. And if you pay too much for a property, you may not be able to cash flow the property, or worse you could be losing money. Never bet on future appreciation of any property as your reason to buy, but instead focus on the present and future cash flow.
Hard money loans are a great option for investors who want to purchase an investment property but don’t have traditional financing available, have poor credit or no credit, or need to close on a property quickly. If you would like to get preapproved to purchase an investment property, reach out to us today.
What is an Exit Strategy for a Hard Money Loan?
When you get a hard money, private money loan to purchase an investment property, a lender may ask you, “what is your exit strategy?” An exit strategy is simply, your plan for paying the loan back, or your “exit” for that loan. Here are a few examples.
Let’s say that you use a hard money loan to purchase a property to fix and flip. In this case, your exit strategy would be to renovate the property and resell the property as your exit strategy for paying the loan back.
What about a rental property? Let’s say you use a hard money loan to purchase a rental property. What’s your exit strategy? Typically, your exit strategy is to get a long-term, permanent mortgage on that property to pay off the hard money loan.
If you use a hard money loan to buy an investment property, another example of an exit strategy is that you may have other assets that you could liquidate and then take that money from the liquidation of those assets and pay off the hard money loan.
When you take out a hard money, private money loan that tends to be a really short-term loan with a high interest rate, you need to have at least two plans for paying that loan back. If your first plan fails, then you have a secondary exit strategy for paying that loan back.
Cash Out & Refinance Loans with Hard Money
What is a cash out refinance loan in real estate?
Do you have equity in real estate that you own? A cash-out refinance loan is a type of loan that allows you to take equity out of investment properties that you already own, in the form of “cash out.” Cash out refinance loans can be done for a variety of reasons, including business purpose, home renovations or repairs, new investment home purchases, for partner buyouts, and more.
The main benefit of taking a cash out refinance loan is that you can pull out equity from a property that you own and use it for specific purposes, such as those in the example above.
Cash Out Refinance Loans with Hard Money
Because of low credit scores, or insufficient monthly income, some borrowers are unable to qualify for a cash out refinance loan from a bank or credit union. A private money loan, sometimes referred to as a “hard money loan,” or private money mortgage, is a type of loan from a non-bank lender, rather than from a bank or from other traditional lenders. These loans are most commonly used in real estate investing but are used by all types of people for different purposes. A private money loan and hard money loan are interchangeable terms and mean the same thing, a loan against a hard asset like real estate.
Hard money refinance loans can be a great tool for real estate investors to purchase another investment property quickly. The cash out proceeds from the loan are used as a down payment on the new property being purchased.
Sometimes a cash out refinance using private money is appropriate and sometimes it’s not. Shortly we will discuss examples of when it’s appropriate and when it’s not appropriate to use hard money loans to fund cash out refinances.
Do you plan on selling the property to pay the loan back? Or will you refinance the hard money loan with another loan, later down the road? Private money loans are short-term loans, and are not intended to be used as long term financing. The loan terms of private money loans typically range from 6 months to 2 years. If you don’t have a diehard exit strategy for paying the loan off within 1-2 months, you probably should NOT get a private mortgage on any type of property.
Hard Money Cash Out Refinance Interest Rates
A cash out refinance loan will usually have a higher interest rate than a standard refinance with no cash out. And the interest rate for a hard money cash-out refinance loan will be higher than the rate for a traditional mortgage. Typical interest rates can range from 9% to as high as 12%.
Usually the higher the loan to value, the higher the interest rate will be. But the interest rate and costs for a cash-out refinance loan from a private lender can also vary greatly depending on the lender, on the loan to value, and on various other factors.
And these loans are short term so they are interest only payments, and not principal and interest payments. For example if your loan amount is $200,000 and the interest rate is 10% interest only, the monthly payment is calculated by taking the loan amount $200,000 x 10% and then dividing by 12 months, which give you a monthly, interest only payment of $1,666.67 per month.
Unlike a 20-30 year loan from a bank, an interest only payment doesn’t include a principal reduction payment, taxes, or insurance. This allows you to free up more cash flow, that you may need when you’re using the cash out proceeds to make an investment purchase or for business purpose.
How much does a refinance cash-out cost?
The loans fees that are part of any cash out refinance, from any lender including banks, are often called, loan origination fees, points, or even loan funding fees. The fees are usually between 1-3% of the loan amount. Loan fees are part of the total loan closing costs.
Real estate investors will often use a loan from a bank or credit union to purchase a new property, taking the cash out proceeds from the hard money refinance of the existing loan on the property to use as the down payment. They will later sell the property with the hard money loan on it, or refinance the property again at a bank or credit union later down the road.
Is there a difference in cash out refinancing from a private money lender and a direct hard money lender?
No, there is not a difference in cash out refinancing from a private money lender and a direct hard money lender. Both terms refer to a non-bank source of financing and mean essentially the same thing.
Why would you get a hard money loan to cash out instead of a conventional mortgage loan?
There are a few reasons why you might want to get a private money loan instead of a traditional mortgage. First, hard money loans tend to be easier to qualify for than conventional loans with looser underwriting guidelines.
And the time it takes for private money lenders to approve loans and fund them is much faster than a bank. This is important if you need the money quickly to purchase another investment property, or for other business purpose.
Once you refinance and existing loan to get cash out of a property, if you use a hard money loan, you will have a higher interest rate. Will the properties generate enough cash flow to cover the monthly payment at the higher loan amount, and the higher interest rate? Since hard money loans are short term and usually under 2 years in length, before you pull equity out of your property you need to have a plan for paying the loan back within 1-2 years.
What types of properties can I get a cash out refinance on?
-Multi family properties
-All Investment Property Types
Can I refinance my primary home with hard money?
As home values continue to rise across the U.S., many people are looking to take advantage of their equity by doing a cash out refinance loan on their homes. But many don’t qualify for traditional loans because they have income from investments and not W-2 income, or for other reasons.
Yes, you can refinance your owner occupied primary residence with hard money. However, your exit strategy is very key in determining if a private money loan is right for you to do a cash out refinance on your home.
In most cases, the answer is no, unless your exit strategy for paying off the private money loan is to sell the property, or if you plan to liquidate another asset to pay off the private money loan in a short time. If you don’t have an extremely certain, die hard exit strategy within a short period of time like 1-2 years, you should not refinance your primary residence with a private money loan.
Another crucial consideration is your purpose for the cash out funds from the loan. Your cash out loan purpose must NOT be to pay off credit cards, pay off other consumer debt, go on a vacation, pay for your child’s school tuition, etc.
Your purpose to cash out of a primary home is confined to very specific things such as improving the property for a higher resale price, to divest a partner out of a property in a divorce settlement for a short term, or for a specific business purpose. These examples are acceptable uses for a cash out loan on primary home, but to cash out of residential owner occupied property for any consumer-related use is prohibited.
What is the maximum loan to value for a cash out refinance?
How much equity can you take out of your property? Let’s say for example that you purchased a rental property for $200,000 6 years ago and now it’s worth $350,000. After the 6 years you’ve owned it, it has appreciated in value and you have a mortgage of $153,000 on it. You would like to purchase another investment property so you decide to get a cash out refinance on the existing investment property to cash out the funds needed for the down payment on the new property.
Most lenders will have an appraisal done on the rental property and then will base the new loan amount on a certain percentage of the appraised value. For example, if the home appraises for $350,000 and the lender give you 75% of that value as a new loan amount. You take $350,000 x 75% and you get $262,500. If you only owe $153,000 on the existing mortgage, that means you could cash out $109,500 ($262,500 which is the amount of new loan, minus $153,000 which is what you owe on the current loan).
In the above example, the lender will give you a cash out refinance loan for 75% of the appraised value of the existing property. However, some lenders will do lower loan amounts (like 65% of the home’s appraised value), if you have poor credit, or if the property is in an area with a small population size for example. But then some lenders may do a higher amount! Some lenders will lend up to 85% of the home’s appraised value on a cash out refinance. Ask your lender, what is the max loan to value you will do on cash out refinances of investment properties?
Are there Restrictions on a Cash-out Refinance?
Residential owner occupied properties do have restrictions on cash out refinances. If the cash out proceeds from the loan are being used for a consumer purpose, you cannot get this type of loan.
On residential rental properties, some lenders will want you to hold an investment property that you purchased for a “seasoning” period before they will let you do a cash out refinance on it. For example, some lenders want you to own the property for at least 6 months before they will do a cash out refinance. Ask you lender, what is the seasoning requirement if I buy an investment property and then want to do a cash out refinance with you?
What is the process for getting a cash out refinance loan?
The process for getting a cash out refinance from a bank or credit union can be tedious and time consuming. This is one definite benefit of using a private money lender to cash out of an investment property rather than using a conventional loan. Particularly if you are buying another property and need to move quickly to close on the purchase.
Many private lenders have a more straightforward process with less documentation requirements, they may not require tax returns, and often do not have a min credit score requirement. The process for getting a cash out refinance from a hard money lender is fast and painless, which is why many real estate investors use them over bank loans.
How long does it take for approval on hard money refinance loans?
Unlike traditional loans, it can take as little as 48 hours to get a loan approval for cash out refinance loans by hard money lenders. Once the loan is approved, the time until funding can be between 2-14 days.
Can you Refinance Reverse Mortgage Loans with Hard Money?
Private money loans can be an excellent tool to refinance reverse mortgages. When someone inherits a property with a reverse mortgage, they must decide if they want to keep the home or sell it. If they decide to keep it, they are obligated to repay the mortgage immediately. In this situation, you could refinance the reverse mortgage loan using a hard money loan because loan approvals happen quickly.
A hard money loan can help heirs to acquire a home. Once the heirs are on title to the home, they can either refinance the hard money loan with a conventional mortgage or fully renovate the home and resell it for a higher price. Because an older home may be dated and in need of renovation, by renovating the property, the heirs would be able to resell it later for a higher price. This is an example where a private loan is the perfect way to refinance reverse mortgages to maximize profit on an inherited property.
We evaluate each deal to make sure it’s a good fit for. If you’re looking for a cash-out refinance on one of your investment homes, reach out to us.
How to Buy a BRRRR With a Hard Money Loan
What does BRRRR mean?
“Buy, Rehab, Rent, Refinance, Repeat,” is a new initialism to describe a classic, real estate investment strategy. Savvy real estate investors have been employing this investment strategy for a very long time, so the concept of BRRRR is nothing new or innovative. But its importance to building a real estate portfolio cannot be understated.
When done correctly, a BRRRR can be an excellent way to build wealth over time from your real estate portfolio. In this article, we’ll explore why funding for a BRRRR is the fastest and easiest when funded with a hard money loan. We will also consider some pitfalls that should be avoided when funding a BRRRR purchase with hard money loans.
To cover the basics super quick here, the initialism, BRRRR, is a method that is described as follows:
Buy: Identify the property you want to purchase and buy it using a hard money loan.
Rehab: Renovate the property as needed .
Rent: Get the property rented.
Refinance: Refinance the hard money loan used for the purchase with a long-term, 30-year mortgage. By refinancing the current loan with a lower interest rate loan, called a “cash-out refinance,” you can take out a slightly larger loan against the property than what is currently owed to the hard money lender. These “cash-out” proceeds from the cash-out refinance loan serve as the down payment used to buy another rental property using a hard money loan.
Repeat: Do it all over again so you can buy more rental properties to add to your real estate portfolio.
Why Buy a BRRRR with Hard Money?
It can be difficult to find a bank loan if you don’t have experience with a BRRRR, in fact, most traditional mortgage companies are unfamiliar with BRRRRs. Using a hard money loan to buy a BRRRR can be a great way to get started in the world of real estate investing if you don’t have the credit, or if you don’t have experience. Many hard money lenders will lend to borrowers with bad credit, some do not require income documentation, and still others will lend to real estate investors with no experience. With a hard money loan, you still may need to bring in a solid downpayment in most cases.
Another challenge that people face is getting a bank loan quick enough to be able to purchase the property. Particularly in a competitive market with lots of investor buyers, a bank loan can be too slow to compete with cash offers. In a sellers market for example, realtors are usually very selective about who they work with and won’t consider offers that are not cash offers.
A hard money lender can get you pre-approved to buy investment properties in advance of making any offers. Because hard money funding is so fast, it is similar to an all cash offer.
How to buy a BRRRR with Hard Money
When it comes to buying a BRRRR investment property with hard money, there are a few things you need to keep in mind. It’s important to note that, even though a hard money lender may not care about poor credit, not everyone will be approved for a loan. Make sure you know what the lender’s requirements are, and make sure you meet those requirements, before you apply. For example, some lenders will require prior real estate investing experience, while other lenders will lend to beginners. Understanding the various requirements of different hard money lenders will help you decide which ones you should pursue for a loan.
Shopping Around for a Lender
There are many, different hard money lenders out there that you can go to for financing, but it’s important to do your research first. Make sure you know which lenders are real and reputable first, by searching for every piece of information you can find about the lenders online and reading each of their online reviews. There are a lot of loan scams in which fake lenders pose as real lenders, just to scam you out of money.
If you can, get recommendations from other people in your target market who have successfully purchased BRRRRs using hard money loans. Make sure you search the lender’s name on search engines, check on sites like Ripoffreport.com and the BBB website, and look for “real” online reviews (it’s pretty easy to spot the fake ones). And then make sure you are comparing “apples to apples” when comparing among hard money lenders. For example, how fast can a lender fund and a lender’s appraisal requirements are two considerations when comparing among hard money lenders.
Hard money lenders differ greatly on what type of documentation each will require in order to fund your deal. Some lenders have almost no documentation, while others require a lot of documentation to get a loan. Do your research and make sure you know what the lender is looking for before you apply. This will make it easier, and much faster, to get the funding you need to purchase a BRRRR property.
What the Lender is Looking for
Lenders want to know that the property you are buying is in a desirable area where potential tenants want to live. All lenders prefer experienced borrowers, but that doesn’t mean that lenders won’t make loans to beginners.
And then there’s the property value. Because the property is the lender’s collateral for the loan, value is a very important consideration for a lender. Is the property worth what you’re paying? Or will you have to increase rents in order to achieve the property valuation you will need to do your refinance?
Many banks require a seasoning period, which is a period of time you must own a property before you can refinance your hard money loan with a long term mortgage. After the seasoning period ends banks require an appraisal to be performed and will only lend you a certain percentage of the appraised value. This is another reason why the property value is such an important consideration for both you and your hard money lender.
And, what if you don’t have a lot of cash to purchase a property? Despite the popular myth that you don’t need your own money to get started in real estate investing, yes, most lenders will require you to bring some money to the table. Even rehab lenders will still want you to show that you have enough liquidity to cover some of the repairs, or at a minimum, show you have enough cash to cover carrying costs.
How much cash does a lender require from a borrower? Some rehab lenders will require minimum borrower cash of 10-20% down of the total project cost if the property needs rehab. While many other lenders will only loan you a percentage of the purchase price for the property, usually between 70% to 90% of the purchase price.
Loan Denial for a BRRRR Purchase
In some instances, your loan might be denied by a hard money lender for one or more of the following reasons:
They don’t like the deal for whatever reason.
The home might be in a bad location, it may be priced too high, it may require too much work, or maybe the numbers just don’t add up.
You don’t have enough experience, a solid plan, or enough money.
The Advantages of Buying a BRRRR with a Hard Money Loan
The Ease of the Application Process
Many hard money lenders make applying for a loan very easy. For example, our application process for BRRRR properties consists of a one-page form to fill out. Once we have the one-page form and a few photos of the property we can give you a yes or no answer on your loan request. And because hard money loans are primarily asset-based loans, these loans require far less documentation than a bank loan.
The Fast Turnaround Time on Funding
In competitive markets where good rental properties are in short supply, you need a lender who can fund quickly. This is probably one of the biggest advantages of buying a BRRRR with a hard money loan, which is fast funding. Look for smaller, lending companies because they can typically fund a loan much quicker than larger companies with high loan volume.
Many hard money lenders will use a local broker’s price opinion to determine property value rather than using an appraisal. Because appraisals can often increase the time it takes to close on a property, this is another advantage of using a hard money lender to fund your BRRRR purchase.
Low Cost to Borrow Short-Term
Interest rates can vary from 8- 12% and the rate depends on the lender. As compared with bank loans, these rates seem really high. But if you’re planning to keep the hard money loan in place for a short time until you refinance, this can be your lowest cost financing.
For example, say you purchase a BRRRR using a hard money loan with a 12% annual interest rate. You keep the hard money loan for 5 months and then you refinance into a 30-year loan with a much lower rate. In this example, the hard money loan only costs you 5%, not 12%. This is a small price to pay as compared with the cost of taking on a partner, or the drama that can come from borrowing money from family or friends.
The Disadvantages of Buying a BRRRR with Hard Money
There are far more advantages to using hard money than there are disadvantages. However, there are two important disadvantages that you should be aware of when buying a BRRRR with hard money.
Excessive Junk Fees
All lenders have junk fees associated with funding the loan, and these fees are different from loan fees, or points. Some hard money lenders have excessive junk fees, so make sure you are aware of all of the fees associated with the loan. Especially when selecting one lender over another, use the total fees as a tool for comparison among various lenders. One lender may have a lower interest rate than another, but his junk fees may be higher as compared with a lender with a higher rate and no junk fees.
Not Everyone Will be Quickly Approved for a Refinance Loan
One thing to be aware of when using a hard money loan to purchase a BRRRR is that not everyone will easily qualify for the refinance. This means you may hold the hard money loan longer than you anticipated. Because hard money loans are far easier to qualify for than bank loans, some real estate investors are confronted with a challenge when refinancing. Someone may not be able to refinance because of a low credit score, while others may not qualify from a DSCR perspective.
For example, if the price paid for the property is very high but the rental income is not high enough to cover the mortgage payment on the refinance. A real estate investor may be betting on future appreciation of property value and is willing to take a loss on annual rents. But banks like to see the rental income is enough to cover the mortgage payment, taxes, and insurance. If the rental income doesn’t cover all of these expenses, a bank will look at your personal income to cover the loss. If your personal debt to income ratio is high you may have trouble qualifying for the bank refinance.
If you are unable to refinance quickly, this could leave you stuck paying a higher interest rate on a hard money loan for much longer than you expected. In the worst case, you may need to sell the property if you are unable to refinance out of the hard money loan you used to purchase it.
Some lenders require that you keep the loan for a minimum period of time before you pay it off. Always ask your lender if there is a prepayment penalty on the loan, sometimes this is called a guaranteed interest period. If there is a prepayment penalty, it is usually the sum of the interest from the day you pay off the loan through the lock out date. Some hard money lenders want a minimum of a three month loan term, while some want a minimum of six months.
You’re Approved for a BRRRR from a lender. What’s next?
Once you’ve found a hard money lender that has approved your purchase of a BRRRR property, then what’s next?
-Plan Your Exit Strategy: Make sure you qualify for the refinance to take out your hard money lender. What is the seasoning requirement of your take-out lender? Will the property value be high enough to pay off the loan and cash out for your next purchase? Does your rental income cover your loan payment, taxes, and insurance?
-Start Looking for Properties: Once you’re approved by your hard money lender and you’re 100% certain you can qualify for the refinance, it’s time to start looking for properties. Make sure the properties you are looking at will meet your hard money lender’s requirements. Really understand the property value, look at market comps, look at market rents, make sure you’re not overpaying for the property. And don’t make assumptions about rents, make sure your projections are accurate. And then finally, make sure your projected rents will cover the loan payment on your hard money loan.
Build Wealth Faster with BRRRR Properties
When done correctly, a BRRRR can be an excellent way to build wealth over time from your real estate portfolio. Using a hard money loan to buy a BRRRR can be a great way to get started in real estate investing if you don’t have the credit, or if you don’t have any experience. And by using hard money loans to acquire BRRRR properties, you can scale your real estate portfolio faster, and as a result, you will build your wealth faster.
If you’re looking for a BRRRR loan, reach out to us to discuss your financing options.
5 Reasons You Need a Hard Money Loan (To Buy A House)
In today’s competitive real estate market, a hard money loan can give you that competitive edge to buy an investment home.
A hard money loan is a great way to get the home you want without having to wait for conventional loans. The hard money loan can provide you with all of the cash needed to buy the house, without too many hoops to jump through, such as proof of income, or credit checks.
Hard Money Loans Facilitate Cash Deals
Cash is king in a competitive real estate market. Oftentimes, the seller will accept a cash offer over one that needs traditional financing. Hard money loans come with quick processing times, which is quite the opposite of a traditional mortgage.
You Don’t Have to Have Great Credit
One of the main benefits of hard money loans is that many hard money lenders will not perform credit checks or have the typical bank, qualifying standards, so they can be a good option for people who don’t have an extensive personal credit history or have poor credit.
It’s also harder to get rejected when applying for hard money loans because they’re based on physical collateral such as property equity and not always on paper qualifications such as credit scores or income.
You Need to Close Your Loan Fast
Hard money loans can close in as fast as 24 hours. Instead of getting an appraisal which can take weeks, most hard money lenders will use a broker’s price opinion of value (BPO) to gauge the true market value of the property being purchased. You can get hard money loans in as little as 24 hours, but you need to have the property under contract and a pre-approval with a hard money lender.
The Lost Opportunity Cost of Not Doing the Deal
When you’re considering a hard money loan to buy a house, it’s important to think about the opportunity cost of not doing the deal, rather than looking at the interest rate or loan fees. The opportunity cost is the amount of money you could lose by not buying the property.
For example, if you have the ability to make a $50,000 profit on a fix and flip, is it worth the cost of paying 3-4 months of interest? Many successful real estate investors certainly think so!
You Don’t Want a Partner
When you’re flipping a property or buying a property to rent, you don’t want, or need, a partner. You’re the one in charge, and you’re the one who’s going to make the decisions. If you have a partner, you’ll have to split the decision-making and the profits (or losses).
With a hard money loan, you’re the one in charge. You can make the decisions about what properties to buy, how much work to do on them, and when to sell. You don’t have to worry about someone else making decisions that could hurt your bottom line.
Hard money loans are great because they come with quick processing times and often, no credit checks. They can also close in a matter of days sometimes, which means you don’t have to wait weeks or months to close on your deal. A hard money loan might be the perfect solution if you’re looking to purchase a house on your own terms, without having partners, or needing any other type of financing. You just need a good property with equity that can serve as collateral for the loan.
Let us know how we can help! We’ll work closely with you every step of the way so that this process goes smoothly. Reach out to us today to get preapproved to buy your next investment property!
The five most important factors that a hard money lender will look at when deciding to give you a loan are the property details, the value, how much cash you have, your experience level, and your exit strategy. It’s important to know these factors in order to get approved for a hard money loan!
What’s a Hard Money Loan?
Hard money loans are a type of financing that is used to purchase real estate investments, or to meet short term loan needs. These loans are primarily asset based loans which means that loan approval is not contingent on a borrower’s credit score like traditional loans.
Unlike a conventional loan or other loan products, a hard money loan comes from private investors. Hard money loan rates might be at a higher interest rate than traditional loans, but they offer advantages to those that know how to use them correctly. Hard money loans can be a real estate investor’s best friend because they help to increase wealth faster.
The property details we need for a hard money loan
The location of the investment property is important when applying for a hard money loan. Is the property in a prime area, in the suburbs, or in a rural location? Some lenders will not lend on properties in rural locations or in cities that do not meet a minimum population size.
What other property details is a lender looking for? The property description. What is the property types? Is it land, residential, or commercial. If it’s a house, provide the square footage, the number of bedrooms, bathrooms, the lot size, the number of garage spaces, and the year built. If you’re renovating the property, what changes will be made to the current layout?
Real estate investors should have all the above information when looking for hard money loans. Make sure to find out if the property description will fit the the hard money lender’s criteria.
How much cash can you bring in?
A hard money lender will also look at how much cash you have to bring in as a down payment on the purchase of a property. This is known as the loan to value ratio. Hard money lenders will usually loan money to someone who can bring in a down payment that is at least 10-20% of the value, or 10-20% of the purchase price.
Real Estate Investing Experience
The lender will also look at how much experience you have and your track record with managing real estate. You need to be able to demonstrate that you know what you’re doing or that you have a qualified team in place to help you.
If you’re looking for funding on a fix and flip property, hard money lenders will also ask about your past performance in house flipping. Do you have a history of rehabbing the homes and reselling them?
Some lenders will offer lower interest rates if you are experienced in house flipping. Private lenders want to be sure they can get their loans repaid without hassle. The more experience, the better.
Hard money lenders also look at the property value and how it compares to the total purchase price. It’s important for a hard money lender to know if you’re going to be able to make a profit on this investment property.
The market value of any investment property is determined by comparing its size, age, location, condition, and features with the prices of other properties in the same area. Here are some things to keep in mind as well:
How much does this investment property sell for? What is the cost per square foot? If this is a fix and flip, what will (ARV) after repair value?
What’s your Exit Strategy and plan for paying back the hard money loan?
What does your plan look like if the value of the house goes down, if it needs more work than expected, or if your tenant loses their job? What happens if one of these circumstances happen after you’ve already bought the property?
Remember that hard money loans are short term loans with higher interest rates than traditional bank loans. These loans can get costly if things don’t go as planned.
These are the five main factors to consider if you’re looking for an easy way to get a hard money loan. These hard money lenders work differently from a traditional bank and you need to know the basics of how these loans are different.
All of the factors can affect the average interest rate and loan amount. Hard money lenders expect their money to be paid back in certain amount of time. The interest rates might be higher than a personal loan or traditional mortgages, but most of the time the credit score is irrelevant. Now that you know all of these things it will be easier for you to get approved for a hard money loan.
Hard money lenders can fund much quicker than a traditional lender. Especially big companies like Rocket Mortgage, they can take forever to fund a loan!
We recommend that you talk with someone from our team about how we can help. If you aren’t ready yet, check out some videos we’ve made for you to help answer some of your additional questions.
We tailor our hard money loans to meet your investment goals and will work with you every step of the way. Our expert staff is here to help you succeed in real estate investing, so don’t hesitate to contact us if you have any questions or concerns. Remember, hard money doesn’t need to be hard!
You should use a hard money loan for your real estate fix & flip. Here’s why!
Flipping houses can very lucrative if you know how to do it right. But funding flips is the most important because you can’t do fix and flips without the money, right? Real estate investors who are buying fix and flips with hard money loans know that it’s a great way to make money and build wealth fast.
Here’s what you need to know if you’re considering using hard money loans for your next fix and flip.
Real estate investors have limited funding options to choose from when buying investment properties because good deals don’t wait for bank loans or appraisals. This short article will focus on hard money loans and why they are such an attractive option for investors who are interested in doing fix and flips.
What’s a Hard Money Loan and why would you want one for a fix and flip?
A hard money loan is a type of loan that is very different from traditional financing options like conventional loans, or bank loans, because it funds quickly and with less requirements. Example: Most hard money lenders don’t have a minimum credit score to qualify. But like any loan, the borrower agrees to pay back the loan with interest. The interest rates for fix and flip hard money loans range from 10% to as high as 18%.
Why are Hard Money Loans Attractive to Investors for Fix and Flips?
Hard money loans are attractive to real estate investors who do house flipping because they fund quickly and there’s not a lot of hassle in getting the funding. Many savvy investors regularly use hard money to buy a fix and flips because it can fund much quicker than a conventional mortgage loan which can drag on for months.
How to Get a Hard Money Loan for your Fix and Flip
To get a hard money loan, you’ll need to find a hard money lender who is willing and able provide you with the funds that you need for the fix and flip. You’ll also need to be pre-approved by a lender before the lender will agree to loan you the funds, so it’s important that you get started looking for lenders right away.
If you are able to find a lender who is willing to lend you money on a property purchase, they will need the information for the property you are looking to purchase to give you final approval. Most hard money lenders can fund quickly in 3-5 days if there’s no appraisal requirement. Appraisals tend to slow down the funding process so not all hard money lenders require appraisals determine property values.
The Benefits of Using a Hard Money Lender vs Traditional Financing
The primary benefits of using a hard money lender versus using traditional financing include: the speed of funding, no minimum credit score requirement, and no hassle loan approvals. The speed in obtaining financing can often be the single most important factor in being able to buy a property at a good price and make money!
When should I consider borrowing from a Hard Money Lender instead of going through more traditional means like banks or mortgage companies? In a competitive real estate market, unless you are operating with a lot of cash on hand, you need a loan that can fund as quickly as cash. Many sellers won’t even look at an offer to purchase unless it’s a cash offer. Because our fix and flip loans can fund as quickly as cash, they are essential for funding your property purchases in a competitive market.
Common Misconceptions About Hard Money Loans for Real Estate Deals
There are a few misconceptions about hard money loans that need to be cleared up and these include:
– Private money loans are offered only to people who have poor credit and cannot qualify for more traditional types of financing. Wrong. Most hard money lenders don’t have a min credit score. Not all real estate investors have poor credit, in fact, many real estate investors who use a private lender actually can qualify for a bank loan.
– Hard money lenders are all loan sharks that charge excessive interest rates. Wrong. Hard money lenders are debt partners for real estate investors, providing the capital they need to make money in real estate investing.
– Hard money lending is the most expensive option for funding investment property purchases. Wrong. Using your own cash is your most expensive option for funding your fix and flips. And a partnership is also much more expensive than a hard money loan.
While it’s true that many hard money lenders don’t have a minimum credit score requirement, or run a credit check, that’s not the reason real estate investors choose hard money. Real estate investors can use hard money loans on multiple projects simultaneously, building their real estate portfolios faster.
What kind of down payment is needed for flip financing?
Generally, you’ll need at least 20% of your total project cost to get a hard money loan for a fix and flip. But it really depends on each private money lender’s requirements.
Draw Schedule for a Fix and Flip
If a hard money lender provides funds for the repairs to a property, these funds will often be held by the lender in an account called a “repair escrow.” The lender will then release the repair money in draws, or disbursements, as the repairs are being completed.
In order to communicate to the lender how the funds should be disbursed, expect to fill out what’s called a “draw schedule.” A draw schedule should match the bid for repairs, with a cost next to each item, and a grand total at the bottom. But the only difference between a bid for repairs and a draw schedule is that a draw schedule outlines the work in phases so that a lender knows when funds should be disbursed, and who funds should be disbursed to. The lender will disburse the funds to the borrower in “draws” as the repairs are completed, according to the draw schedule.
When to Pay Back the Hard Money Loan on a Fix and Flip
A borrower will need to pay back the hard money loan on a fix and flip property when the property is sold. Some hard money lenders require monthly payments until the loan is paid back, while some lenders do not require monthly payments.
What additional information do you need to obtain a loan for a fix and flip?
Purchase price and loan amount: How much of a down payment will you need?
Rehab and renovation costs: Projected rehab costs can be found by contacting a local contractor and asking them to provide an estimate in writing. Does your lender provide funding for rehab costs?
Rehab time frame: You want your flip to be completed quickly so you pay less interest to your hard money lender.
After Repair Value: What is the property value after the renovation is completed?
Worst Case Scenario: What’s your exit strategy if things go south? If you get injured, go over budget, or the house doesn’t sell in a timely manner, how are you going to pay pack the loan?
Loan to value: The more money you bring in, the better your chances of obtaining the lowest interest rate.
Experience: Your experience in real estate investing can have an impact on the lender’s decision.
If you’re considering a fix and flip property, hard money is the best option for financing your project.
We’ve outlined some important considerations below that should help you decide whether this route will work for you.
Are all of your questions answered? Remember, no question is a dumb question when it comes to hard money loans, so reach out to us to get more information about how our hard money loans work. You can apply for a fix and flip loan here.
How To Use Hard Money For An All Cash Offer
Win with hard money in this crazy real estate market
In today’s ultra competitive market, you can use hard money the same way as you can use cash. Cash is king in the world of real estate!
The sellers who accept cash offers are seeking a quick and easy sale of their property and do not want to wait for the slow loans of their buyers to fund. By making cash offers using hard money, it can increase the odds of getting an offer accepted on a home purchase.
A hard money loan is similar to an “all cash offer” to the seller because of the speed of funding. You can close a hard money loan in as fast as 24 hours in some cases.
Real estate investors bypass traditional mortgage lenders all the time by making cash offers using hard money.
Why hard money is same as a cash offer on house
When purchasing a property, making an all cash offer can be the key to getting a good real estate deal under contract. But if you don’t have all the cash, how do you use a hard money loan like cash?
Hard money loans are asset-based loans. This means they are not approved based on your personal credit score but rather based on the property that is used to secure the loan. And once approved, a hard money loan can typically fund in less than a week, just like cash. This is why a hard money loan acts the same as, or very similar to, an all cash offer
How to Write a Cash Offer Using Hard Money
Here’s how a buyer can make a cash offer using a hard money loan in 3 easy steps:
Step 1. Get pre approved by a hard money lender
Step 2. Identify the property you want to purchase
Step 3. Submit your offer to purchase and write on the offer, “cash and hard money.” There is no financing or appraisal deadline. The settlement date would be shortly after the due diligence deadline ends. Suggest a title or escrow company as your settlement agent on the contract.
What Real Estate Agents Should Know About Writing an Offer Using Hard Money Loans
Realtors must know how to submit offers using hard money to help their clients get more properties under contract.
Here are 3 easy steps for a realtor to write an offer to purchase a property using hard money.
Step 2: When writing up the offer, under the section that lists how you intend to pay for purchase. Write in the amount of the earnest money deposit.
Step 3: Then write, “N/A” next to “New Loan”. Then write the words “cash and hard money” next to where it lists the balance due in cash at settlement when you subtract the amount of the earnest money deposit.
Step 3: In the “financing and appraisal condition” sections of the contract, make sure it says that the purchase of the property is NOT contingent on financing approval, and is also NOT contingent on an appraisal. Most hard money lenders will pre approve you for a purchase and most do not require an appraisal. Make sure your hard money lender does NOT require an appraisal. If the lender does require an appraisal, it no longer would be the same as cash. Because it takes much longer to get an appraisal, it won’t be able to match the speed of a cash purchase if there’s an appraisal requirement.
Paying back the loan
A hard money lender will give you a specific loan term, which is the time you will have the loan until it is to be paid back. For example, a 6 month term, a 12 month term, or a 24 month term. You will make monthly payments to the hard money lender for the duration of the loan term, or until the date until you pay the loan back.
You only pay interest as you go, so you only owe interest for the time you have the loan. For example if you have a loan term of 12 months but you pay the loan off in 9 months, you only pay interest for 9 months for the time you have the loan. Most lenders do not have early pay off penalties but always ask if there is a penalty should you pay the loan off before the due date. Learn more about ext plans here.
What are the Closing Costs and Interest Rates?
A borrower can expect to pay closing costs of between 2-3% of the loan amount on average. Also part of a borrower’s closing costs would be a loan origination fee or loan points. The interest rates on a hard money loan usually depend on the size of the down payment on a purchase and range from 9% to 12%.
The hard money loan is a cash offer on a house. You don’t need to worry about credit score, long wait times for funding, or other traditional mortgage requirements that banks typically require.
It’s easy for real estate agents and sellers to get started with a hard money loan through our team of experts a Private Money Utah!
If you’re ready to buy now but can’t wait weeks or months while waiting on a bank approval, contact us today and let’s get the process started together!
Let’s talk more about how we could help you pay back this quick closing fund as fast as week by providing an affordable monthly payment option.
Contact us today so we can answer all your questions before making any long term commitments.