Avalanche of Money Lenders Replaces Customary Lunch with Private Investors

Luncheons with a coterie of investors with deep pockets used to be the avenue that lead real estate investors to the Land of Ready Cash. Today, however, more and more private lending companies are purveying rehab loans to rehabbers and real estate investors who want to renovate their rental properties. The government is also offering rehab funding with terms and conditions varying from city to city.

A real estate investor does not have to go far to look for a rehab loan. Skipping the need for leafing through the menu of the restaurant where private investors’ money were used to be raised, a cash-hungry real estate investor can instead browse the Internet for a list of lenders for this kind of loan. For the newbie, however, selecting the lenders to transact with could be overwhelming.

What Do You Need The Money For?

When deciding on which type or source of rehab loan to choose, keep in mind your purpose of your loan. Are you about to buy a handyman special or bid on a foreclosure? Do you plan to do up a rental property? Would you be willing to rent out your property to low income families? Do you need the cash immediately? Look for the kind of rehab loans that best suit your needs.

Where To Get Rehab Funding?

Banks. Most banks and lending companies shy away from rehab projects. Some local banks may offer rehab funding but the red tape, sluggish rate of approval and high credit rating requirements that go with bank loans often discourage real estate investors from seeking funding from these institutions. If you are looking to buy a handyman special, you may want to look for other sources of rehab loans that can provide you with faster funding.

Government Grants for Rental Rehabilitation Programs. This is for the socially responsible landlord who is willing to rent out affordable, decent, safe and clean housing for low income families. If your property is located within the given city boundaries and could accommodate at least 10 families, then you may apply for this forgivable deferred loan which funds up to 50% of the total cost of renovation. Other certain conditions you must agree with include renting out the rehabilitated property to tenants below 60% median income, setting maximum rental rates per unit, annual reporting of tenant income and other rental information, and organizing the annual maintenance inspections to be done by the city. Owner occupied units are not included in this program. Provisions for this type of program may vary from city to city.

Private Investors/Hard Money Lenders. This type of lenders still remains to be the fastest source of funding for real estate investors. They can lend you 100% of the acquisition, rehab and closing costs, they require less paperwork and more lenient about your credit rating. However, these conveniences come with a dear price tag. Be prepared to pay at least 15% interest and at least 10 points or 10% fee which is added to the amount loaned. This is suited for real estate investors dealing with a motivated seller or bidding on a foreclosure or estate sale, since the ability to move quickly is of the essence here. Just make sure you have done your due diligence.

With many competing hard money lenders springing up, some have refined their terms into more borrower-friendly provisions. It is better for you to obtain financial sources that do not exact prepayment penalties. Not only are they expensive, they may also hamper your momentum for moving quickly. If you have a good credit standing, opt for private lenders who offer real estate investor-friendly programs such as the “6-Month No-Pay Plan.”

So, which source of rehab funding will you be turning to?

If banks are your only source of funding for your real estate deals, then you must be moving slow and missing on great real estate deals. A fledgling real estate investor may do well if he includes in his network a number of hard money lenders. These are private lenders, who could be private individuals or lending companies, who provide short-term loans to fund real estate deals. The loan amount granted will depend on the value of the property in question, which is also put up as collateral. Despite their appellation, they can, in several ways, make a real estate investor’s life easy.

Hard Money Lenders for the Fast and the Serious

In real estate investing, it pays to move fast. And the fuel to your speed is liquidity. If cash is at your fingertips, you can attract great real estate deals. When acquiring a property, you can negotiate a lower asking price if you can pay in cash. This translates to a bigger profit margin or you can opt to sell the property at a lower price for a faster exit strategy.

If you are really serious with real estate investing, you must develop good business relations with hard money lenders because they can supply you with cash faster than banks do and they do not fuss about your credit rating. When applying for a bank loan, you will have to wait for 30 days or more for approval. That is, if you scored well with FICO. But when dealing with people in the hard money lending business, you will be counting fewer days, perhaps hours, if you have successfully tempered your relationship with them with a solid track record.

What Makes Hard Money Lenders Hard?

Now that we have seen their “soft” side, let us examine another side of them that makes them worthy of their name. Hard money lenders face greater risk than banks because they do not screen borrowers according to traditional credit guidelines, such as asking for income verification. This means they come up against higher default rates. For this reason, they charge higher interest rates which usually range from 12% to 20% per annum, with terms lasting six months to a few years.

To mitigate this risk, people involved with hard money lending usually require that the real estate loaned on be used as collateral. In some cases, however, the other assets of the borrower may be included as collateral to be able to obtain a larger amount. Hard money lenders typically base the amount they lend on the “Loan To Value Ratio.” A common figure would be 70% of the After Repair Value of the property. For instance, if the After Repair Value of the property is $100,000, the borrower gets to loan $70,000. Should he want to loan a larger amount, he can present other properties to add as collateral.

Hard money lenders may also charge closing fees which could range from 2 to 10% of the mortgage amount. They may also demand hefty prepayment penalties. So think again before deciding to pay your loan in advance.

While early hard money lenders protect their assets by just inspecting the property in question, a number of them today may ask for credit application that may probe about your tax returns, bank statements and current pay slips.

You may have noticed that hard money lenders are soft while borrowers are in the process of borrowing. But once you mess up with your payments, that is when they live up to their name. So make sure to correctly do your numbers before getting a hard money loan to avoid a hard time with hard money lenders.

Have you had any experience with hard money lenders? Tell us about it.

Nothing Fancy – Just Another REO Purchase

This home was a standard REO home listed for $55,000.  We originally offered $35K and came to a final compromise of $38K with the bank.  Once again, our offer was accepted over other higher offers solely on the basis that ours was a non-contingent cash offer.

This is the 10th property added to our rental portfolio all of which are in the same neighborhood.  This property was purchased with all cash in order to keep things simple and provide leverage for our offer.  Based on the 50% LTV after repairs on this property and the large equity positions in our other properties, our commercial lender allowed us to cash-out 100% of the purchase price and and provided us 100% of the repair funds for our latest project.  So at the end of the day, we have no cash invested in this deal.

Project Numbers

Only 6.3 years to Payoff this Rental Property

The plan is always to use all the positive cashflow to help pay down the monthly mortgage in order to own these properties free and clear as soon as possible.  In this case here, after a proper cash reserve is established, we will take the $379 monthly cash flow and apply it to paying off the mortgage which will happen in a short 6.3 years!

Rehab Analysis and Walkthrough, Pt 1

Our construction manager and partner performs a detailed walk through of the property the day after we get it under contract.  We discuss numbers and first impressions since this is the first time some of us our seeing the inside of the property.

Rehab Analysis and Walkthrough, Continued…

Below our video continues with a look at the basement and the plan for its rehab.

Real Construction Budget Estimate

The numbers listed below are actual repair costs for a standard bank owned single family home. My partners and I have rehabbed over 50 homes together and we have never been able to achieve the cheap rehab costs as shown on Flip This House and other quick flip home shows. I do know that our costs are in line or less expensive than what other investors pay in our area.

Kitchen Repairs Needed!

Garage Demolition Required

Shower Rehab Needed!

Garage Demolished

Kitchen Rehabbed

Rehabbed Bathroom

Duration of Rehab = 25 days