Hard Money Loans for Investors

Hard Money Loan.

As a real estate investor there may come a time that it is to your advantage to get a Hard Money Loan (HML, bridge loan, private financing or equity based loan) for a transaction that you can not get financing from a conventional lending. As a matter of fact even if the rate and fees may be higher on an HML it may be better for you even if you qualify for conventional financing. These short term bridge loans can help you close a “HOT” real estate investment deal and utilize creative financing that you may not have been able to employ using conventional financing. Ultimately the goal is to make money. Private money programs are designed to do just that. They help the borrower make money as well as the lender, with as little red tape as possible.

How to Qualify for a Hard Money Loan.

The underwriting by HML lenders is different from conventional. Yet the criteria reviewed is the same. Basic underwriting reviews the 4 C’s of credit. They are Collateral, Capacity, Credit and Character. Each criteria is looked different based on the program. Let us compare the two.

Collateral.

Whether conventional or bridge financing both place a heavy emphasis on the property, which is the collateral. From a conventional perspective the value is always based on the lower of the purchase price or the appraisal. Another important factor is ownership seasoning. Standard guidelines view the value as the lower of the appraised value or purchase price for the first 12 months of ownership. A Hard Money Lender will consider the After Rehab Value with minimal consideration to purchase price. As such a conventional lender may lend 80% of the value to an investor while a HML lender only lends 65% of the ARV. The 65% may actually be higher.

Capacity.

This is the ability to repay the loan. For the tradition investor loan the lender reviews the income verses the debt and bases the approval on an acceptable maximum debt to income ratio. Where the bridge loan lender reviews the file they want to make sure the borrower has a solid exit strategy to pay off the loan completely. If they require monthly payments they do review debt ratio’s to insure the borrower can make the payments. The ability to repay the loan is important in both situations because all lenders want their money back to make more loans. Contrary to popular belief Private lenders do not want the property. If they did they would just invest in below market distressed property. They have the money. No, they are in the loan business. They make their money by making short term loans and reinvesting the proceeds to make more short term loans.

Credit.

While excellent credit is essential to a convention financing source it is not so important to a Hard money lender. If your exit strategy is to refinance the property the lender wants to ensure you can. But if you are going to sell, they are more concerned that you have a buyer that qualifies to buy the property. This goes back to the importance of a solid exit strategy.

Character.

A conventional lender really can not and does not make personal character determinations about a borrower. They only look for compensating factors like time on the job and stability factors. Savings and assets are important as well. For a bridge program, the lender can talk to the borrower, review their experience and they have much more flexibility based on their feel for a borrower. After all this is private money and no one can dictate who the lender will lend their money to when it is for business and investment purposes.

Real Estate Investor.

With this information in hand a real estate investor can know where they need to improve to guarantee their real estate investment project. As a HML broker All Dominion can evaluate your deal and suggest areas of improvement, helping you to qualify and preparing you to make lots of money as a real estate investor.

Hard Money Loan.

A loan from a hard money lender is a short term financing arrangement made to a real estate investor who usually want to purchase and rehab a commercial or residential property. The interest rates and fees on these loans are much higher than conventional financing. They are attractive to real estate investors because most of these loans are made based on the after rehab value of the property. The collateral is the most important qualifying criteria for this type of loan to the private lender. The collateral should also be the most important criteria to the real estate investor. The collateral is the investment and the basis of any investment is to buy low and sell high with as little risk as possible while investing as little money as possible. Understanding this basic investment philosophy and having a tight focus on your own real estate investment philosophy will help you choose the right investment property.

Personal Investment Strategy.

Once you decide to invest in real estate the first choice you need to make is to determine the type of property you want to invest in and the location or area you want to invest in. First do you want to invest in residential or commercial property. If you choose to buy residential property do you prefer single family homes or 2, 3 or 4 unit properties. These decisions may be guided by the property available as well as financing options. Whether you choose to invest in residential or commercial property the availability of financing is a key factor. Historically it has been easier to finance single family residences. Since all financing has gotten tighter financing larger units may be a better option in todays market. Just in general the more units you are financing the lower the loan to value lenders are willing to lend. The reality is that in todays market there are more financing sources for commercial properties than there are for residential investment properties.

Criteria for Financing a Property with a Hard Money Loan.

A simple strategy I employ when investing in real estate, whether residential or commercial is to not invest in more than 50% of the after rehab value. That means the total acquisition costs plus the rehabilitation costs will be equal to or less than 50% of the After Rehab Value. Your acquisition costs include any costs associated with the purchase of the property. This includes all soft costs, title charges, attorneys, taxes, transfer, insurance, inspections, appraisals, and financing costs. Your rehabilitation costs are labor, materials, permits and inspections. The total of your acquisition and rehabilitation costs should not exceed 50% of the the after rehab value because you need a solid exit strategy to refinance or sell the property after your investment property has been rehabbed.

Exit Strategy.

When you invest property by using a hard money loan most lenders require a solid exit strategy. Remember your interest rate is much higher than you would pay for conventional financing and your loan is only for a short term as a requirement of the hard money lender and in your best financial interest you should have a solid exit strategy. A solid exit strategy is not selling the property, if you do not already have an approved buyer in place. A solid exit strategy is not refinancing the property if you can not qualify for the refinance loan. So ultimately, you should have an approved buyer in place or you yourself can qualify and have been approved to refinance the property. This is why when you choose an investment property the after rehab value is greater than 50% of the acquisition and rehab costs. These properties are easier to finance and easier to sell for a profit. You could even sell to another investor, pay off your hard money loan and make a profit.

Return On Your Investment.

Though the costs of a hard money loan may seem obsene at times, where can you invest little or no money in an asset that doubles in value in less than 6 months. You can investing in residential and commercial real estate. A hard money lender can make you a fortune if you understand leverage and choose the right properties with a solid exit strategy.

Get a Real Estate Investor Rehab Loan.

There is great opportunities for real estate investors in the market today. This is the best market for real estate investors in our lifetime. But unfortunately financing is not so readily available. There are options for financing purchase and rehab projects for real estate investors. Whether you are investing in commercial multifamily housing or residential investment properties there are lenders to finance purchase or refinance investor rehab projects. Since there is no secondary market for these types of projects your deals will fall into one of two categories. Your deal will either be a non conforming investor rehab loan or a hard money rehab loan.

Non Conforming Real Estate Investor Rehab Loan.

There is no such thing as conforming investor rehab loans. Conforming means there is a secondary market that will purchase these loans on wall street. The secondary market would the have established guidelines that all projects would have to conform to. Since this market does not exist the first category of loans are considered non conforming. Any rehab loan funded in this category will meet guidelines that are similar to conforming mortgages. Whether commercial or residential these loans would meet the guidelines as all other loans except they require major rehab and are investment properties. This means the borrower, real estate investor, would need good credit, verifiable income, an ability to repay the loan, acceptable down payment and reserves, and higher licensed bonded contractors to do the rehab. The advantage to the non conforming real estate investor rehab loans versus the hard money loans is that the rate and fees are substantially lower.  The dis advantage is that there are many more qualification criteria and it takes longer to get the financing. But if you qualify and have the time it is to your advantage to take this loan versus a hard money real estate rehab loan.

Hard Money Loans.

Though the rates are much higher and the fees will be from 4% to 10% hard money loans could actually be more profitable to real estate investors than non conforming investor rehab loans. First of all these loans generally fund in 2 to 3 weeks. Secondly, the qualifications are much less and therefore you can do more loans. Truly you may qualify for a hard money loan when you will not for a non conforming loan. As such you have no option.

Qualifications of Non Conforming and Hard Money Investor Loans.

Both programs require you to purchase property where the after rehab value is 65% or less. Both programs require you to have an acceptable exit strategy. Non Conforming programs will always require a down payment of at least 20% of the purchase and rehab costs. Hard money loan programs may or may not require the down payment. Both programs will make sure the contractor or investor has the experience and sometimes licensing to complete the project. So if you have the experience, property, exit strategy and assets you can make lots of money by purchasing and rehabbing investment property.