Since 2008, conversations and questions about the pros and cons of hard money loans have taken over the real estate investment world. Some private investors are still confused about the nature of these loans, while others have jumped on the bandwagon and partner with hard money lenders to fund every project.
The truth is hard money loans are relatively simple investment tools with quite a few benefits that often go overlooked. Here are the facts:
Hard money lenders typically fund on a loan-to-value ratio (LTV), meaning they loan up to a certain percentage of the property’s current market value, typically 65-75%. Some may lend based on of the property’s after repair value (ARV), which is the expected value of the property after renovations are complete. This is a core component to hard money lending, because it allows lenders to fund loans for investors with less than stellar credit histories, since lenders are primarily concerned with the asset being financed rather than the borrower’s financial history.
Property valuation involves several different approaches. A typical hard money lender will assess an investment property the same way an investor would. The lender will want to know if there is enough money in the deal for the investor to not only make a profit, but to also be able to pay off the loan and associated fees.
Among the documents required in order to obtain a loan is an investment remodel plan. This is a key feature lenders will evaluate when deciding whether or not to finance your deal.
In this process, hard money lenders will examine the current specifications of the property including: lot size, home square footage, location, bedroom and bathroom count, etc. A savvy lender will then research various comparable properties in the area to find out the most desirable and attainable specifications for the renovated subject property. In other words, they will assess what needs to be done to this property in order to get it into market ready condition and create the highest profit potential. Many times there are several different renovation options for the same property. Each property is different and some investors will need larger rehab budgets than others. An experienced hard money lender will review your remodel plan and either approve it or advise alternative approaches that may yield more favorable results.
Once the remodel budget has been decided, the lender will assess what the property will sell for after it has been renovated. Typically this process includes finding recently sold properties that have similar specifications that the asset will have post-renovation. By comparing the sale price of these properties the hard money lender will have a better idea of what the property will likely sell for and can evaluate the profit margin.
Many lenders, Intrust Funding included, refuse to finance investment properties that they do not believe will be successful. In the instance that an investor is rejected because of the property, it is a good idea for the investor to either request a second opinion or not purchase the property at all. While it may seem preferable to get a second opinion, the lenders that advise against purchasing a property are working in your best interest and are not interested in attaining your collateral, but rather in funding a successful deal.
We specialize in hard money loans for real estate investors. Prequalify today and receive your first draw within 48 hours of closing!
New to real estate investing? Learn from the pros at Intrust Funding. Become an expert by taking our Investor 101 course!
It’s the bottom of the ninth and there are two outs. Who is batting for you? You’ve done your research, your financial documents are ready, and you’ve found the investment of your dreams, but how do you decide who to trust to back you financially? Here are key characteristics to help you find a lender that’s right for you. Hit this one out of the park!
Because a hard money loan is funded by a private lender and not a bank, there isn’t as much red tape involved in applications and funding amounts. This is a double edged sword. It is to the advantage of borrowers that private money can move without many regulations–for instance, we use this to help borrowers fund deals quickly, as Intrust Funding can provide funding within 48 hours of approving your application–but there are others that use less oversight to take advantage of uninformed borrowers. That’s why it’s important to know both how many loans a hard money lender has funded, and what their loan default rate is. A high default rate means that a lender’s underwriting principles are either just bad or predatory. Intrust Funding has funded over 1,500 hard money loans, and our default rate knocks our competitors out of the park: it sits at less than 1%.
Whether a hard money lender is local is arguably one of the most important predictors of the quality of their customer service and underwriting principles. The reason is that local lenders should know your real estate market. A local lender not only will have experience providing loans in your market, but they should also more accurately underwrite your asset with your specific market’s activity in mind. This is very beneficial for you as an investor. On average, borrowers of local lenders have a lower chance of defaulting on their loans due to greater underwriting accuracy. Additionally, local lenders tend to be more invested in your personal success and can give you more personal attention than an out of state lender.
Just as business is a broad term, so is finance, and not all lenders are created equal. Especially when financing a risky asset such as an investment property, you want be sure you are in good and knowledgeable hands. Your lender should have specialized experience in funding a narrow range of assets. Specifically, they should not be focused on other financial avenues (traditional banking, mortgages, etc.). Their job is to provide short-term bridge loans, period. At Intrust Funding, we think of our borrowers as partners, because an informed borrower is successful. That’s why we focus on transparency in the loan process. Our borrowers are always in the loop, understand our underwriting principles, and, whether new or seasoned, feel confident that they have competent partners who are experts at hard money lending.
As the saying goes, “time is money”. Your lender shouldn’t have any difficulty returning calls, completing draw requests, or generally answering any questions you may have. Given today’s market conditions, you may lose out on a property because you aren’t able to find financing quickly enough. One of the main advantages to using hard money is the ability to close quickly. If you find that your “opportunity cost” is increasing, you may want to look for another lender.
Another characteristic to watch out for are unusually high loan rates (i.e. 15-18% interest). Hard money loans lend on distressed properties on a loan-to-value (LTV) basis. Generally, lenders will charge around 12% interest and 2-4 loan origination points.
And, of course, with any financial decision, choosing a lender is not to be taken lightly. Your lender should be experienced (at least a few years in business) and should be able to provide you with client references and testimonials upon request.
We specialize in hard money loans for real estate investors. Prequalify today and receive your first draw within 48 hours of closing!
New to real estate investing? Learn from the pros at Intrust Funding. Become an expert by taking our Investor 101 course!
Jorge Gabuardi and Rachelle Boyer shared their experiences flipping houses and buying properties with hard money loans from Intrust Funding.
Discover why real estate investors in Western Washington trust and choose us!
Recently we sat down with Francisco Figueroa and Rhonda Williams to ask about their experiences flipping houses and buying properties with hard money loans from Intrust Funding.
Discover why real estate investors in Western Washington trust and choose us!
Because hard money lenders fund projects conventional loans typically won’t cover, there are a lot of misconceptions about what hard money loans actually are.
Here Intrust Funding takes on a few common myths by talking about the facts.
As an alternative to conventional lending, many investors are using hard money lending.
One reason is because hard money lenders like Intrust Funding underwrite investment properties based on expected ARV (after repair value) rather than current property value. As a result, neither credit score nor property condition are significant factors when investors apply for hard money loans.
The key to becoming a good investor is to use hard money loan programs to fund your profitable deals. Even more important is finding the right lender! It’s no surprise that shopping around for a lender can be a daunting task. We’re here to help make the process more streamlined.
Those unfamiliar with the real estate or finance industries may be confused about what “hard money” lending really means. Here are the facts.
Hey Kathryn, one of our loan consultants have reached out...April 12, 2019 - 2:08 pm by admin
Do you do land and construction of a custom home?April 12, 2019 - 9:52 am by Kathryn Warner
This is really useful, thanks.April 11, 2019 - 10:35 am by See here
Thanks to the great guideApril 9, 2019 - 9:46 am by Malorie
