May 8, 2015 in Investing In Real Estate
My buddy Bill Walston and I are in Nashville today setting up for another Deal Maker Bootcamp this weekend. We love doing these small group events.
I have a guest post for you today while I'm gone on a favorite topic for real estate investors, and that is “funding your deals”. You can't have access to too much cash now can you?
Today's guest post is from Jeff Hensel of North Coast Financial. Let me know if you have any questions.
Hard Money Loans
Next time you need financing for real estate, walk into a bank and tell them you need a loan to purchase a property. Request same day loan approval and that funding is completed in 5-10 days as you need to close quickly in order to avoid missing out on the deal. Once the employees at the bank stop laughing, you can politely excuse yourself and leave. This same request made to a hard money lender would be dealt with in a completely different way.
After a quick overview of hard money loans, 6 big advantages for real estate investors using hard money will be explained.
What is hard money?
Hard money is a type of short-term loan secured by real estate. The funds for the loans come from private investors instead of traditional lenders like banks and credit unions. The loan terms are generally around 12 months, but longer terms of up to 5 years are available in some situations.
Hard money lenders determine the amount they are able to loan based on the value of the property being used as collateral. They will generally lend up to 75% of the value of the property. This ratio of the loan amount to the value of the property is commonly referred to as the LTV (loan to value).
The main benefit of hard money loans over traditional lenders like banks is the ability of a hard money lender to quickly approve the borrower and fund the loan. Hard money lenders can approve and fund a loan faster than it takes the bank to realize they have a new loan application! Experienced hard money lenders are able to provide financing within a week in most circumstances.
Because hard money loans are collateral-based, the application process focuses less on the borrower’s income, credit scores, or issues like recent foreclosures, short-sales or bankruptcies. When the banks are all saying “No”, hard money lenders can still say “Yes”.
Types of Properties Hard Money Lenders Can Finance
Hard money loans are available on any type of property including single-family residence, multi-family residence, land, industrial and commercial. Not all hard money lenders lend on all types of properties, with many lenders having specific types of properties they specialize in.
Due to recent increased government regulations, many hard money lenders will not lend on owner-occupied properties. Also, some hard money lenders will only do loans in 1st position and will not consider a loan in 2nd position (when property already has another existing loan). Finding hard money lenders who will do these types of loans generally isn’t too difficult.
Hard Money Loan Interest Rates and Points
The rates and points on a hard money loan can vary greatly between different lenders and by region of the country. In general, the interest will be in the 9-13% range and points range from 2-4%. The higher the LTV the higher the rates and points due to the increased risk to the lender.
California has some of the cheapest hard money rates due to the high amount of hard money lenders who lend in the state. Other areas like Idaho have higher costs because there are only a few lenders who fund hard money loans there. Competition between lenders will help the borrower get a better deal on lending costs.
6 Big Advantages for Real Estate Investors Using Hard Money Loans
Now that the basics of hard money loans have been explained, here are some very important advantages that real estate investors are able to benefit from when using hard money.
- Fast funding so deals aren’t missed out on
Many properties, especially distressed properties, need to be put under contract and closed quickly. A good hard money lender can generally fund in 5-10 days. If there is a very urgent need to get the funds sooner the hard money lender may be able finance the deal even quicker.
- Getting an offer accepted over competing bids
An offer on a property with hard money financing is stronger and increases the likelihood of being accepted when compared to an offer with traditional bank financing. An experienced seller (or experienced agent representing the seller) understands that hard money lenders are able to fund quickly and much less likely to encounter a last minute issue that would prevent them from funding the loan during escrow. Banks have a bad reputation for sometimes stumbling across some small detail about the deal that causes them not fund the loan.
- Negotiating lower purchase prices or other beneficial terms
A property owner who needs to sell their property quickly will be more likely to negotiate with a buyer who can offer a quick close. This puts an investor into a position of power when they offer a quick close with a hard money loan. This can help the investor with negotiating a lower purchase price or other favorable terms.
- Using leverage in order to do more deals
Paying for a property with cash is a great strategy for getting an offer accepted at a better price and saving on lending costs. But paying all cash has its drawbacks as well. If too much of an investor’s cash is tied up in one or two deals, they risk not being able to pull the trigger on a new opportunity that arises while the other deals are in progress. An offer with hard money loan allows an investor to provide a better offer than traditional financing while still keeping enough cash on hand to act on an opportunity that may be around the corner.
- Pulling equity from existing properties to put it to work elsewhere
While having a high amount of equity in a property is positive thing, that money may be able to get higher returns if reinvested in a different project. A hard money lender can quickly process a hard money cash out loan for an investor. The funds can then be reinvested as a down payment on a new purchase or used to improve an existing property.
- Obtaining financing when at the max for conventional loans
Many banks allow an investor to have only four financed properties. Hard money lenders do not have these types of arbitrary restrictions. The hard money lender will be able to provide funding regardless of the amount of financed properties an investor has. The hard money lender will primarily be concerned with the amount of equity the investor will have in the new subject property.
Hard money loans have a lot to offer real estate investors who can’t afford to miss out on deals due to slow financing. Hard money isn’t appropriate for every situation, but it comes to the rescue when needed and gives investors an advantage over competition using bank loans. Hard money really shines in the areas where the bank loans fail miserably, speed of funding and flexibility.
North Coast Financial, Inc. is a hard money lender in San Diego, California with over 30 years of experience. For more information about our loan programs or to inquire about a loan please contact Don Hensel.