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.

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Many times investors ask me to send them information on a hard money loan. As a mortgage broker with many programs and options it is hard to tell them exactly what the qualifications are for financing their project. They are many because hard money lenders are private investors. Each private investor makes up their own guidelines. Unlike conventional financing there is no secondary market and there are no quasi government organizations like Fannie Mae or Freddie Mac that establish uniform or conventional guidelines. There are qualifications that each bridge and real estate rehab lender have in common. They are:

1. The property and after rehab value.
2. The exit strategy.
3. The down payment.
4. The investors experience.
5. The investors credit.
6. The investors cash reserves.

The Property.

There was a time and will be again were the property and the after rehab value of the property was the sole consideration of doing a short term loan to a real estate investor. Whether the deal is commercial or residential investment property this remains the most important key to the deal. The reasons it is not the only criteria is that lenders have been burned by the declining value of properties and the excess of properties available. This means that if they have to take the collateral for the short term loan the property has been harder to sell and they get less money for it. Yet the collateral still remains the most important criteria. The lower the loan to value the better the deal. Even though some lenders will go as high as 65 to 70% of the after rehab value those deals are tough when so many are available at or below 50%.

The Exit Strategy.

Almost of equal importance to the collateral to many purchase rehab lenders require a solid verifiable exit strategy. This means if you say you are going to sell it you should have a buyer who is pre-approved and their information needs to be verifiable by the lender. If you say you want to refinance the property then you need to have the income, credit and assets to qualify for a conventional refinance loan. Whatever your exit strategy is it must be verifiable by the lender. This is good for the lender and for you. No one wants to get stuck with a non performing asset.

Down Payment.

Though there are programs that do not require down payment they are fewer than ever. Most purchase rehab lenders require a down payment. For this reason it is good to be prepared to invest 20% to 30% in your projects. Because there are so many projects available yet funds are limited a down payment makes your project easier to fund. Also if you have poor credit assets help.

The Investor.

The credit, assets and experience of the investor plays a role in the qualification process. For a real estate investor qualify the should have good credit, assets and experience. If they do not and are short in any of these areas they need to be stronger in others. Meaning they should have a deal with lower than 50% loan to value, a strong exit strategy and or a down payment. Because each private investor has different criteria, it is hard to say one deal will qualify and another would not based on one criteria or another. But, the first three are the most important. Most deals that the real estate investor has that requires funding will qualify based solely on the after rehab value of the property, the exit strategy and the down payment. Even though there are no down payment deals available you need to be a strong investor to qualify for them.

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The reason real estate investors choose to use hard money loans is that they provide a means to purchase and rehab property and make a substantial profit that they may not have without the use of this expensive money. The hard money loans are expensive and even if they were legal for a home owner to borrow from the private lenders offering these loans it would never be advisable. So how hard are these private loans you should ask? The answer is threefold. They are restrictive in loan to value, they are high in rate and high in fees.

Restrictive in Loan to Value.

The maximum loan to value for many hard money loans range from 50% to 70%. No deals are done at the higher loan to value for two reasons. First the hard money lender requires lots of equity in case of default they can list and sell the property quickly because they will in theory be below market value. The reason I say in theory is because there are so many REO’s, Short Sales and foreclosure properties on the market today that what was normally considered an exceptional deal is common place. For that reason The private lenders are more particular about the properties and loans they choose to fund.

Secondly, any real estate investment that has less than 30% equity are not good investments for the investors unless they are purchasing the property for the cash flow. In that case they are long term investments and not suitable for the short term nature of these expensive bridge loans.

High Interest Rates.

Whether you are an investor buying and or rehabbing commercial or residential investor properties the rates are substantially higher than they would be for conventional commercial or residential lending. The rates are higher because the risks are higher. The risks are higher because these loans are not underwritten based on the standard conventional guidelines and there is a very limited or no secondary market for private bridge loans. This is generally not an issue because the borrowers know these are only short term loans. The terms range typically from 3 to 24 months. Therefore, the higher interest rate is of minimum importance because both lenders and borrowers know that the borrowers have an exit strategy to quickly payoff these high interest rate loans. Many lenders require a viable exit strategy before they make the loans.

Higher Points.

Because these loans are short term in nature the hard money lenders always charge discount points. They typically charge 4 to 6 discount points. In addition the private money brokers will charge 2 to 5 points. So on average a borrower is paying 8 to 10 points. Plus closing costs. These are high fees. They only make sense when an real estate investor will make substantially more money and they have no other way to fund the deals.

Why Use Hard Money Lenders.

Simply to make money. As a real estate investor you have choices in financing your deals. You can choose conventional financing that requires at 30% to 35% down payment for properties that are in good shape. There are many other conventional requirements including credit, cash reserves and the current value of the property versus the after rehab value of the property. These all make conventional financing almost impossible.

The other option is to use your own funds and not finance a deal at all. But, most astute real estate investors know that if they can make a net profit of $25,000, $50,000, $100,000 or more using a hard money loan they do not like the fees but they we pay them versus not making any money because of lack of financing.

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