Why Hard Money Loans are the Best for Real Estate Investing

As we continue to recover from the 2008-2009 economic crash, one of the most popular forms of investment today continues to be in real estate. Buying up older, unattractive homes, renovating, and then selling them at a higher value is called “flipping” and is one of the best ways to make a decent profit.

The problem is, finding short-term funding for those hoping to make their first investment in the fix and flip game can be difficult. Without extra capital at hand, it can be nearly impossible to buy and renovate a home, especially when the process often takes longer and costs more than is ever anticipated.

Whether you’re new to the flipping game or you’re a grizzled veteran, hard money loans are the best way to fund a project. Also called ‘private money loans’, this type of capital isn’t acquired through the bank system, but rather though a private investor more willing to take the risk at the expense of higher rates.

Why Hard Money Loans Work for Investors

Why Hard Money Loans Work for InvestorsGetting a home loan isn’t easy. Not only does the bank make the buyer jump through a lot of hoops, it can take many months to get the money. But, if you’re buying a home, you’re not looking to move in and spend the next 30-years paying it off. Instead, you need the money ASAP to get on with the renovations and have it sold within a year.

Because it’s easier to get a hard money loan and the qualification requirements are lower, that takes the burden off new investors looking to jump into flipping. In fact, most flippers get their hard money loans within 15 days, not several months. This means you can be ready to start renovating within two weeks.

The Right Investor

If you’ve ever seen the show Shark Tank, you’ll sort of get the idea behind the motive of a lot of these investors. The number one thing they always want to know is what the value is of what they’re investing in. What will they get out of it? The same is true with hard money loans. The investment is in the potential value of the home and property AFTER it has been flipped.

This is what makes it easier to get a hard money loan. It’s not about the borrower’s financial status, but what they feel the value of the updated home will be. This also means that the borrow doesn’t have to worry much about the added interest to the loan. Once they finish the renovation and sell the home in that year, they can pay it back fairly quickly.

That means it’s not the interest the lender hopes to make money on, but the project itself. The high interest rates only make up for the added risk the investor is making. Once the home sells and a better track record is initiated, then the buyer can most likely obtain better hard money deals. Either way, it’s still the simplest way to gain capital for your investment.

Why the Bank Won’t Accept Your Loan

Hard Money LoansIt’s often said that if you want to make money, then you need to have it. Investing in anything requires a certain amount of capital. For a lot of people, the answer is simple: get a loan! But with real estate investing, it can be quite a bit more complicated than that. Banks and other lending agencies sure don’t make it easy to get a home loan.

Going the traditional route to obtain a home loan is a bit messy and time consuming. You’re looking at several months of process only to find out you don’t have every “I” dotted or “T” crossed, and suddenly your wait turns into a big fat ZERO. There are several reasons why you might be denied a home loan. Here are several:

 

1) Your credit score might not be as good as you think. A lot of people don’t realize they have three credit scores, so when they investigate what theirs might be, they only pull from one, not all three. When banks look at your credit, they look at all three numbers and choose the middle one as a good indication of your risk.

2) You don’t have a lot of cash. Getting a home loan often requires a hefty closing cost and down payment. This means you’ll need to pay as much as 6% of the home’s value upfront, and that’s just the minimum. You’ll find each closing will be different, which means you could be expected to pay more than 6% of the value. No cash means no reward.

3) It’s difficult to track your income. Your lender will take a long look at your work history and average together what you made during a 24-month period. Have you had a different, lower-paying job in the last two years? It doesn’t matter that you’ve recently been hired in the last 12 months and make a lot more money now than you ever have before. What you made at your last job will be averaged in, lowering what you may think you’re qualified for.

There are a few other income related issues to be aware of. Every bit of income you wish to claim requires 24 months of history. You’ll need 24 months of overtime if you want to use that to prove what you’re making. If you worked two different jobs, you’ll have to show you worked at both of them for 24 months straight.

Also, if you have a job gap that’s six months or larger, that will raise a lot of concern about your ability to pay it back. Lenders want to make sure you will be able to pay them back at the rate agreed upon. If you can’t prove you’ve had steady employment for those two years, they will be less likely to work with you.

Hard Money Loans

You might be thinking that someone who invests in real estate should get a home loan, but there are much easier and faster ways to find the capital you need.

How to Get Approved for a Hard Money Loan

Hard money loans are quite different from any other kind of loan out there. They’re often called private loans, because they aren’t obtained through the typical banking system. These are loans that are given for the purposes of real estate investment that are privately funded. This makes hard money loans much simpler to get than the typical bank loan.

What’s great about hard money loans is they don’t require you to have all your eggs in the basket before you can apply for one. The typical home loan has a lot of red tape, regulations, and qualifications. Private loans, on the other hand, are backed by collateral in the potential value of a flipped home, not your own personal financial history.

If you’re an investor looking to purchase a home for the purposes of renovating, updating, and then selling, you really don’t need a long-term loan. Hard money loans are typically used as financing for construction projects. You’ll need the money as soon as possible to start the renovation work.

So, what do you need to get a hard money loan? Here is some of the top advice on the Internet for obtaining a private loan to help you with your real estate investment:

Do Your Homework

1) Do Your Homework. They often say that the devil is in the details, and the same is true for hard money loans. If you’ve been rejected by the bank, resist the temptation to sign with the first lender you find. How you get treated by these investors can be the difference between night and day. Some actually do care about your project, and others are nothing more than loan sharks, ready to eat you like prey.

To combat this, do your homework. Do they have a verifiable website that looks good? Check to see if they have any outstanding lawsuits, the types of projects they’ve invested in, and if possible, spend time with a member of their team. Take them to the site and show them exactly what you want to do to get a good sense of their reaction.

The key is also to find the investor who fits what you’re doing. If the guy you choose to apply with focuses mostly on medical facilities, and you’re trying to flip an old house, you might not necessarily be good partners. So, choosing someone who shares the same ideas you do is a great first step getting approved.

2) Know the value of the property you want to purchase. Just like with any investment, the investor wants to know what they’re getting out of taking the risk to go your way. In order to do that, you have to prove the value of what you’re doing. The financing happens not because of the amount of money you make. Your credit score doesn’t really come into play.

When you apply for a loan, you should have all the numbers worked out ahead of time. You must prove to the investor that investing in you will be worth their time and their money.