A real estate investment can be a lucrative approach for building wealth, and it certainly is a powerful way to diversify your portfolio. More so, because it’s easier to go about one now than it ever has been!
For a while now, real estate crowdfunding vehicles and real estate investment trusts (REITs) are helping people invest passively.
However, if you are someone who prefers to own property directly, or if you aren’t comfortable parting with a considerable amount of cash upfront to purchase real estate, a hard money loan just might be your thing.
While this type of loan has various benefits over traditional financing, it does have a few potential drawbacks. A certain capital buffer is still going to be required to get into the deal.
But, don’t worry. I’ve got you covered!
In this article, I’ve compiled a list of crucial tips on using hard money loans for real estate investments that will help you manage your money and time in a better way.
1) Have a Clear Idea of How Soon the Property will become Profitable
Hard money loans have their own set of pros and cons.
So although they rank highly in terms of convenience, the average rate can be nearly 10 percentage points higher than that of a conventional loan. The loan-servicing fees, origination fees, and closing costs associated with a hard money loan also have a higher probability to cost investors more.
The aim of such a loan is to help an investor to get a property ready to go on the market as quickly as possible. As a result, these loans have much shorter repayment periods when compared with traditional mortgage loans.
Flippers and landlords often encounter an issue or two once their renovations start making progress. There is a high probability of uncovering problems that aren’t readily visible on the surface in house systems like plumbing, electrical or even structural disparities. There could also be a hidden mold somewhere.
Under such circumstances, if a contractor decides to quit and you’re left with a half-finished project, delays are bound to happen until you can get another contractor or agency onboard.
Unexpected issues can arise at any given point in time. If they do, you want to make sure that the hard money lender you choose provides you with the option to extend and won’t call your note or foreclose. Also, if they do offer an extension period, it is important to inquire how long they can extend and is there going to be any change in initially agreed-upon terms.
There is a chance that the hard money lender tries to use such a situation to his advantage and increases or even doubles the interest rate, charges an additional origination fee or looks for other ways to make money on your unfortunate situation.
Due to all these reasons, when choosing a hard money loan, it is extremely important that you first perform a real estate market analysis and have a clear idea of how soon the property will become profitable. This will help ensure that you are able to repay the loan in a timely manner and avoid any overhead costs arising as a result of wrong judgments with respect to completion.
2) Thoroughly Educate Yourself on the Terms of the Contract
Since hard money loans are usually supplied by private companies and individuals, the loan requirements can vary greatly between lenders. However, since the borrower more often than not deals directly, or closely with the lender, there’s greater room for negotiating terms.
If it’s your first time requesting a loan for investing in real estate, you’ll likely have a harder time getting approved and might need to supply additional information that a veteran investor would not have to supply.
In consideration for a hard money loan, the majority of lenders first verify the property values for the asset in question, review the borrower’s investment history, and under normal circumstances, require anywhere around a 30% to 40% down payment to secure the loan.
Learn to read between the lines. When it comes to acquiring hard money loans for real estate, there’s a greater probability that not everything is stated directly within the contract. This is especially true because, in such a situation, a lot will also depend on your relationship with the lender and the understanding you two share.
Therefore, always educate yourself on the terms of the contract, and the benefits and risks involved in it. Don’t hesitate from asking any questions that may arise during your term of dealing with the lender. This gets us to our last consideration –
3) Don’t Hesitate to Ask any Questions You Might Have
Irrespective of whether you have some past experience with the lender or are completely new to his ways, you’re going to have questions. Every lender has a different approach and follows different standards when it comes to fixing the terms and conditions of the agreement.
For instance, at times, small hard money lenders do not have the means to service their loans in-house. This could mean that they’ll either sell the loan or hire an outside servicing company. As a consumer, this can be tough on you because you are no longer working with the original company.
It is better to always first inquire about this beforehand.
Similarly, another important question that a lot of borrowers tend to have is whether the hard money lender they’ve chosen underwrites clients often.
Today, the majority of hard money lenders out there advertise that they do no underwriting for the borrowers. At times, they may also claim that there is no borrower screening. This may look like a great deal on the outside since you can acquire a hard money loan swiftly based solely on the property, and there are not many hoops to jump through.
However, you may notice a few problems here if you are careful.
If they’ll lend to just about anyone, they are taking on added risks. If a loan doesn’t perform and the borrower can’t make their payments in time then the house gets foreclosed on, and the borrower loses all the material, time, and money that they’ve invested in the project up to that point. This can be devastating.
Furthermore, the foreclosure process is both daunting and heavy on the pocket. You’ve got court fees, legal fees, and a lot of other hidden costs.
Due to all these reasons, one best practice here would be to always inquire about all the questions you may have before signing the deal, or even at a later time as you go about the process.
All in all, hard money can be the catalyst that takes your investment to the next level, provided that you know how to use it efficiently. And although these tips and tricks are designed to help you better understand the industry and find the right lender, there’s a lot more you need to educate yourself on when planning to opt for such a loan.
Before you go all in, try and acquaint yourself with the latest trends in the industry, current market rates, and talk to people who’ve taken this route in the past.
