Real Estate Investing With Hard Money Loan
Updated: Aug 16, 2020
Real estate is considered to be a safe investment as the price volatility in this sector is less compared to the stock market. Historical records prove that the price of properties generally shows an uptrend in normal economic conditions. Disasters (like COVID-19 pandemic) or recessions can cause temporary fall in prices as discussed in the previous blog and these falls can be a great opportunity for first time home buyers and real estate investors.
Factors deciding the pricing
Area and location are the key factors which decide whether the property is hot or not. The target property type also matters. It can be residential, commercial, industrial or open land. Other factors being connectivity, interest rates, economy, demand and supply.
Now one can decide to opt for being a landlord and enjoy the rental income or investing in the real estate investment trust (REIT) or property flipping. With many familiar with REIT and rental income, let's throw some light on how to flip a house or property?
Property flipping strategy
Property or house flipping is also known as real estate trading. One can consider a property flipper to a trader in the stock market who is a short term investor.
Good knowledge of the real estate market can be a deciding factor otherwise figuring out a good project to invest in can be a challenging task. As a flipper, if you succeed to close at a price which is lower than its intrinsic value you already have made a profit. They would avoid paying too much for a property and also have a fair idea about how much more capital it would require for repairs.
Profits are made when you buy, not when you sell.
A successful property flipper has a good knowledge of renovation and expertise in real estate valuation and marketing. They buy the property to fix the damages or do the repair and restoration work and relist the property in the market for sale.
When you decide to get a property it can be financed with your own money or it can be funded with a loan as the majority of people choose.
Funding with hard money loans
As mentioned earlier flipping house is a buy and sell game rather than a buy and hold one. It is a short term process ranging from a couple of months to a year.
Hard money is unconditional financing for getting your real estate funded without having to qualify for traditional financing. A traditional loan process can take a long time and here are chances of the deal of missing on the deal
The eligibility test for hard money loans is based on the merits of the deal and not personally on the borrower in most of the cases. One should also take note of how much it is going to cost in order to borrow it as it is directly related to your profits as higher cost of borrowing can result in the low-profit margin.
Fees associated with hard money loans:
Interest: Hard money loans are interest-only loans which mean 100% of the monthly payment interests and you pay a bulk amount of principle in the end. A typical hard money interest is 10-12%.
Points: Amount charged by the lender for availing the loan. 1 point= 1% of the loan amount.
Extension fee: Charged in case if the duration is extended.
The other fees include inspection fee, processing fees, application fees, etc.
How much hard money can you get?
The hard money lenders, in general, would lend 70% which is a loan to value (LTV) of after repair value (ARV). In other cases, the Loan to construction (LTC) can be up to 80-90% which includes the purchase price and repair costs. which means you can flip a property by investing just 10-15% of the project value.
Time to flip real estate
Capitalism they say is responsible for rich-poor divide. With the recession hitting the market is ready for some major corrections and the people having money can utilise it to flip properties. Also making money by flipping a house can be very tempting and hence, one should avoid making mistakes when flipping a house as it can burn your fingers.