Tag Archive for: beginner investor

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7 Real Estate Loan Fundamentals – Hard Money 101

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For a successful investment career, start with these 7 real estate loan fundamentals.

Are you “money wise”? It’s not hard to get there. And it will save you a lot of cash down the line.

It’s like when a person who knows about cars goes to a mechanic – they have peace of mind because they understand what’s going on. If you’re not a “car person,” at the mechanic’s it’s harder to figure out if they’re telling you the truth, or just trying to sell you more than you need.

As a real estate investor, leverage is at the center of what you do. It’s like a foreign language when you first start out. But when you become money wise, the leverage in your real estate investment career is fully in your hands.

Here are 7 real estate loan fundamentals that will make you money wise.

Fundamentals of a Real Estate Deal

There’s certain information you’ll need to bring to your lender when you need a loan. If you know the answers to their questions, the time with your lender will be much more productive.

At the end of the day, lenders want to know: Do you have a good deal? (And you should want to know the answer, too!)

We’re going to dive into 7 main concepts to answer that question:

  • Strategy
  • Purchase Price / Contract
  • Scope of Work
  • Budget
  • Estimated Profit  / Equity
  • Comps / ARV
  • Exit Strategy

1. Strategy – What Is a Real Estate Strategy?

When your lender asks about your strategy, they want to know whether you’ll use the property as a

  • fix-and-flip
  • a rental
  • or if you’re not sure yet.

What is a real estate strategy dependent on? 1) your goals, and 2) the property.

You’ll have to know the numbers to know if the property will make a good flip with carry costs you can afford, or if it would cash flow well as a BRRRR-style rental.

But how do you “know the numbers”? Let’s start with the cost of the property.

2. Purchase Price / Contract – What Are the Fundamental Numbers of a Real Estate Loan?

Your lender could refer to this as purchase price, contract, or as-is value.

In real estate investment, there’s a distinction between what you’re paying for a property and what it’s worth. The purchase price isn’t necessarily what the value of the home is. 

This is the number on the contract, the number you’ve agreed to buy the property for. And this number is foundational to whether or not your project will turn a profit.

3. Scope of Work – How Do You Fix Up a Real Estate Investment?

Many beginner investors mistake “scope of work” for the budget. Scope of work is what you’re going to do to the property, not the number of what that work will cost. 

Will you add a bedroom? Re-do the garage? Are you going to convert the porch to additional square footage? Or add egress windows to the basement?

Scope of work is your rehab plan. Lenders need this info to find out what kinds of properties they should compare to yours to estimate an after repair value.

4. Budget – What Is a Real Estate Budget?

During the conversation with your lender, have a high overview of your construction budget. You don’t necessarily need all the details ironed out quite yet.

For example, you can estimate that the kitchen will cost $10,000, siding $6,000, windows $4,000, and new paint $2,000. At this point, you don’t need to share a breakdown of the cost of each new appliance, labor and materials, etc.

You just need a realistic estimate of how much it will cost to get into the property. Having your scope of work lined out helps you with an estimated budget. When you know the purchase price an your budget, then you know how much the entire project will cost.

5. Estimated Profit (Flips) / Estimated Equity (Rentals) – How Much Will a Deal Make?

Estimated profit is what you expect to make on the transaction, between buying the property, fixing it up, and selling it again.

Equity is the difference between the amount you owe and what the property is worth. You build equity on your rentals by successfully refinancing after a flip and paying down the mortgage with rent income.

The number one reason to be in real estate investment is to make money and create wealth – it’s true for lenders, and it’s true for you. So, it’s important to both you and your lender that your properties make profit or build equity.

You’ll need your estimated profit / equity when you bring a deal to your lender.

6. Comps / ARV – What Does ARV Mean in Real Estate Investing?

ARV is the after repair value. It’s what the property will appraise for, or sell for, on the current market once the scope of work is completed.

You estimate a property’s ARV by looking at the prices of similar homes in the current market. 

Comps (comparables) are those similar homes you look at. It’s important that your comps have the same value as your property.

For example, if your deal is for a 950 square-foot home, you’ll compare it to other 900 to 1,000 square-foot homes on the market, not a 2,000 square-foot one. A 2-bedroom, 1-bath house will be compared to houses of the same specifications, and not compared with 4-bedroom, 2-bath homes.

For your ARV to be accurate, you need to stay true to your scope of work. If you only repaint and re-carpet a house that needed much more work, you won’t get top-of-the-market value when you try to sell or refinance.

On the other hand, if your scope of work is a full remodel, your comparables should be homes that are fully remodeled, so you don’t miss out on any profit.

The money you put into fixing up a house isn’t a direct indicator of how much the house will be worth. What the property looks like when it’s finished has nothing to do with how much it cost to get it there.

To find the true profitability of a deal, your ARV and comparables help:

ARV – (Purchase Price + Budget) = Profit Amount

7. Exit Strategy – How Will You Pay Your Real Estate Loans?

When a lender asks for your exit strategy, they want to know your plan for paying off the loan. For hard money loans, your exit should be fast.

If it’s a flip, your exit strategy is to sell the property, then pay off the loan.

If it’s a rental, your exit strategy is to refinance into a long-term loan, which will pay off the hard money loan.

The Why Behind Money Wise – Real Estate Investing Definitions

When you come to the table prepared, with strategies, numbers, and knowledge, you can speak the same language as your lender.

This is key to ensuring you have a safe transaction with a lender that is working in your best interest.

Curious About Other Real Estate Loan Fundamentals?

If you have any questions, or want coaching through a deal, we’re happy to help. Reach out at HardMoneyMike.com.

For more info on real estate loan fundamentals, keep up with our Hard Money 101 series on our blog, or visit our YouTube channel here.

Happy Investing.

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What’s an Example of a Subject To?

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Subject to deals are unique (and potentially confusing). Here’s a subject to example deal – what the process should look like from beginning to end.

Why the Seller Wants a Subject To

A subject to starts with a seller who has a problem. Either they can’t make payments on their property, or they need to move ASAP (got a new job across the country, etc). They can’t sell the property as fast as they need to; or maybe they could sell, but paying 6% realtor fees and 2% closing would leave them upside down.

The seller would rather have someone else take over the property and make the loan’s payments. This saves the seller’s credit and helps them avoid foreclosure.

A subject to helps a seller get out of a messy situation.

Closing the Sale

Once you find a seller, you’ll need to set up your terms. You’ll go through a typical closing, so you can get a title report and check for any existing liens.

You’re responsible for any liens on the property. They may have a first, second, or judgment lien that would become your responsibility. You don’t want to get stuck with a property whose value is way undermarket.

Payment Example for Subject Tos

After closing, you’ll need to set up the payment system to the seller’s mortgage company. Many people use a third-party escrow company. They make the payments to the escrow company, and that company makes the actual payments to the mortgage lender.

A seller’s credit is on the line when they agree to a subject to deal. If you offer to use a third-party company to make the payments, that could give the seller the reassurance they need to go through with a deal.

The escrow company may cost five to twenty-five dollars per month, but it’s a small price to get in on an existing loan with 2.5% – 3% interest.

Read the full article here.

Watch the video here:

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3 Ways a Hard Money Bridge Loan Makes Your Life Easier

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Some lenders might talk about hard money and a bridge loan as the same – that’s okay. But it will benefit you to know the particular uses for bridge loans.

The basics of a bridge loan are that they’re used to bridge you from one project to the next. You pay the loan off when the first property sells. Using bridge loans can make your investment career smoother, faster, and more profitable.

Here are 3 ways you can use them.

1. Bridge Loans to Get from One Property to the Next

The most common use of bridge loans in the hard money space is to bridge you from one property to the next.

When you have a flipped property that’s almost complete – the work is done, it’s under contract, it’s almost sold – you might want to get started on your next project without waiting for the official close.

The problem is: How do you buy a new property without the money from selling the old one? A hard money bridge loan solves that problem.

A bridge loan allows you to use the property that’s about to be sold as collateral for a new loan for a new property. Once the first property sells, some of that money is used to pay off the bridge loan. Then you own the new property free and clear.

This way of using a bridge loan is especially useful if you have a lot of cash put into one property. You don’t have to wait to get that money back after selling to start on your next investment.

2. Bridge Loans to Cover a Down Payment on a New Property

You can use an advance of the equity on a current property as the down payment for the new property through a bridge loan.

Maybe you’re about to sell one property. And you’re able to get financing for your next one… Except you can’t cover the down payment.

In this case, you’ll probably use a bridge loan in conjunction with a hard money loan. The hard money loan covers the property cost, and the bridge loan covers the remaining down payment cost. Then that bridge loan gets paid off when you sell the old property.

3. Bridge Loans to Close Fast

Another way you could use a bridge loan is to close faster on a new property.

Maybe you plan on using more traditional financing through a bank, but the bank loan wouldn’t be ready in time. You can use a short-term bridge loan.

This loan bridges you from the closing to the refinance. A bridge lender will help you with the initial purchase. Then once your bank (or hard money) loan is completely ready – usually several weeks or a month later – that bank loan pays off the bridge loan.

Bridge Loans in the Hard Money World

Typically bridge loans are used for 3 situations in real estate investing:

  1. When you’re buying a new property and already have one listed for sale
  2. When you need to cover down payment on a new property
  3. When you find a great deal but your bank’s financing won’t be ready in time.

Read the full article here.

Watch the video here:

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How To Make Sure a Subject To Is a Good Real Estate Investment

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Not all subject tos and owner carries are created equal. Here are some tips on knowing when a property will be a good real estate investment for you.

Good Real Estate Location

In the upcoming market, don’t settle for properties in bad locations. A good real estate investment is a deal in a good area.

As more foreclosures happen, more REITs and investment companies will buy large amounts of rental properties, creating new “rental areas.” Your target tenants might want to avoid those areas. You might have more success buying in “better” areas.

Good Real Estate Investments – Know Your Goals

When you go into a subject to deal, you’ll need to know the terms that will make the investment worth it to you, along with the goals you’d have for the property.

How long do you want to carry this property? Can your seller agree to those terms? What does your seller require?

What’s your plan? What are your options for this property? Will you want to rent out the property, or look at lease to own or contract for deed options?

In addition to a traditional subject to, lease to purchase and contract for deed deals are worth considering. Those buyers will give you a down payment, which is a lump sum you can use to fund the property’s fix-ups, put in a reserve, or just keep in your pocket.

Subject Tos are Good Real Estate Investments, Even with High Loan-to-Value Ratios

Often, subject tos will have a high loan-to-value ratio. It’s often around 90%, but we’ve seen subject to properties with over 100% loan-to-value.

Naturally, this could give you pause, but high loan-to-value properties are okay for subject to deals. They’re still good real estate investments. As a subject to buyer, you know:

  • There’s no money out of your pocket.
  • Rent will cover your payments.
  • The loan will amortize down.
  • Over time, you can own the property free and clear, and when the market’s up, you could sell for straight profit.
  • You can create wealth without even using your own credit.

Subject tos are a good real estate investment if you have no experience or money – or if you do!

Read the full article here.

Watch the video here:

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Why Gap Funding and Bridge Loans Will Grow Your Real Estate Business

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The difference between gap funding and bridge loans – and why it matters to your real estate investments.

Gap funding, bridge loans – they sure sound similar. What’s the difference? How are each of these types of funding going to improve your business?

Both gap funding and bridge loans have the power to smooth out your real estate career and grow it to new heights.

Here’s what you’ll need to know.

Bridge Loans vs Hard Money Loans

Some lenders will use these terms interchangeably. After all, they are similar concepts, and lingo varies from lender to lender. But it’s important to know the actual definitions so you understand these terms if a lender uses them this way.

Though similar, there are differences to know in a bridge loan vs hard money loan.

What is a Bridge Loan Used For?

A bridge loan is a very short-term loan – even shorter than the typical hard money loan. It helps you bridge the space between one project and another.

Let’s say you’re just finishing up a flip. The house is on the market, buyers are showing interest, and now you’d like to get another property bought so you can jump right in to your next flip.

Typically, you use the money from selling one property to buy the next one. But if you want to get that next property started before the current one is sold? That’s where a bridge loan comes in.

A true bridge loan covers up that gap between projects. It gives you the money to close on a new property before the first one is completely sold.

A bridge loan lets you overlap from an old project to a new one.

How is a Bridge Loan Different from a Hard Money Loan?

A hard money loan is longer and broader than a bridge loan.

  • The average bridge loan lasts 30 to 45 days. Hard money loans can last up to a year or longer. 
  • Bridge loans get you from one property to the next. Hard money focuses more on a single project. 
  • Bridge loans are paid off when your old property sells. Hard money loans are paid off when you refinance or sell the property the loan was originally for.
  • A bridge loan is used as temporary funds to close on a house. A hard money loan can be used as a more general budget for a purchase. Many come with the option for escrows to fix up the property over time.

Certain lenders do pure bridge loans, while others lump it all under “hard money.” Keep in mind as you’re learning the real estate investment game that bridge loans vs hard money loans serve different purposes.

3 Ways to Use a Hard Money Bridge Loan

Some lenders might talk about hard money and bridge loans as the same – that’s okay. But it will benefit you to know the particular uses for bridge loans.

The basics of a bridge loan are that they’re used to bridge you from one project to the next. Then you pay the loan off when the first property sells. 

1. Bridge Loans to Get from One Property to the Next

The most common use of bridge loans in the hard money space is to bridge you from one property to the next.

When you have a flipped property that’s almost complete – the work is done, it’s under contract, it’s almost sold – you might want to get started on your next project without waiting for the official close.

The problem is: How do you buy a new property without the money from selling the old one? A hard money bridge loan solves that problem.

A bridge loan allows you to use the property that’s about to be sold as collateral for a new loan for a new property. Once the first property sells, some of that money is used to pay off the bridge loan. Then you own the new property free and clear.

This way of using a bridge loan is especially useful if you have a lot of cash put into one property. You don’t have to wait to get that money back after selling to start on your next investment.

2. Bridge Loans to Cover a Down Payment on a New Property

You can use an advance of the equity on a current property as the down payment for the new property through a bridge loan.

Maybe you’re about to sell one property. And you’re able to get financing for your next one… Except you can’t cover the down payment. 

In this case, you’ll probably use a bridge loan in conjunction with a hard money loan. The hard money loan covers the property cost, and the bridge loan covers the remaining down payment cost. Then that bridge loan gets paid off when you sell the old property. 

3. Bridge Loans to Close Fast

Another way you could use a bridge loan is to close faster on a new property.

Maybe you plan on using more traditional financing through a bank, but the bank loan wouldn’t be ready in time. You can use a short-term bridge loan.

This loan bridges you from the closing to the refinance. A bridge lender will help you with the initial purchase. Then once your bank (or hard money) loan is completely ready – usually several weeks or a month later – that bank loan pays off the bridge loan.

Bridge Loans in the Hard Money World

Typically bridge loans are used for 3 situations in real estate investing:

  1. When you’re buying a new property and already have one listed for sale
  2. When you need to cover down payment on a new property
  3. When you find a great deal but your bank’s financing won’t be ready in time.

Gap Funding for Real Estate Investors

So, bridge loans are different from hard money loans. But where does gap funding fit into the mix for real estate investors?

Bridge loans do bridge “gaps” in your investments. But “gap funding” is something different.

Gap funding is the small amounts that investors need throughout the course of a project in addition to the bigger loan. Examples of common gap funding situations are:

  • Down payments
  • Contractors and other fix-up costs
  • Carry costs before renting or selling
  • Interest, insurance, and other payments not included in the original cost of the property.

A bank or hard money lender will be funding the majority of your project. And when you don’t have other properties, you can use a lien (like you would for a bridge loan). But without another property, you need gap funding to cover the little costs that slip through the cracks of your primary financing.

Gap funding for real estate investors can be a loan that’s anywhere from $10,000 to $100,000. Whatever costs your primary loan and your own cash won’t cover will need to be filled by a gap lender.

Where Do You Find a Gap Lender?

Gap lenders aren’t exactly like hard money lenders. You can’t walk into a gap lending institution and ask for a loan. So where do you find a gap lender?

Who are Gap Lenders?

There are some hard-money-style lenders out there that focus on gap funding, but they’ll charge you a 12 – 20% interest rate. The best place to find reasonable gap funding is with ordinary people.

Traditionally, gap lenders are people you meet – family, friends, people in real estate groups, or anyone with money who wants to dip a toe into real estate investing. These people have a couple tens of thousands of dollars they’d like to make a better return on.

Half the people in real estate groups want to be real estate investors, but don’t want the burden of managing an entire project. Gap funding is secured with a lien against the property, so lending is safer than investing.

Gap lenders tend to have around $50,000 to $60,000 they’d like to put toward real estate. Not enough to do a full transaction, but perfect to fill the gaps your financing will leave on your flip.

Where Can You Go to Find Gap Lenders?

Get involved in the real estate community, and keep your eyes and ears open. Go to meet-ups. Talk to people with money. 

A lot of how to find gap lenders boils down to: How do you convince them to give you money? How do you set up the lending relationship?

If you have questions on how to find and approach gap funders, you can watch these videos, use our OPM checklist, or reach out at HardMoneyMike.com.

Where Do You Find a Hard Money Bridge Loan Lender?

How about bridge lenders? Does every hard money lender do bridge loans?

A lot of people use the term bridge loan interchangeably with gap funding or hard money, but a true bridge loan is slightly different. They’re shorter-term than a hard money loan, and they’re typically less expensive because of that. 

Which Hard Money Lenders Do Bridge Loans?

To find these quick, short loans, a small local lender, like Hard Money Mike, will be your best and fastest option. Smaller hard money lenders like working with investors who provide good, safe returns. Bridge loans do exactly that.

Bigger hard money lenders do bridge loans, too. But they may take up to four weeks to close, which often defeats the purpose of true bridge lending. 

You can also get bridge loans from some banks. Not big, national banks, but many local banks and credit unions who work with real estate investors may do bridge loans, too. Banks usually offer the cheapest bridge loans, but can take 3 – 4 weeks or longer.

Ask around to lenders you know to find out their pricing and see if their bridge loans are worth it. You can use our free loan optimizer to find out if you can get a good deal on bridge loans near you.

Where to Go From Here

The best deals in real estate investment close quickly. Gap funding and bridge loans are important tools to have in your belt so you can do this.

Gap funding and bridge loans are useful for beginner and experienced investors alike. They can enable you to work on multiple projects at once and increase cash flow.

There’s money in the money. If you understand the money side of real estate, your business rises to the next level.

We can always help with your real estate investment education.

Watch more about funding advice with these videos.

Email or message us anytime at HardMoneyMike.com.

Happy Investing.

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How Much Money Do I Need to Start Investing in Real Estate?

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How much money should you have if you want to start investing in real estate? It all depends on the deal.

No Money Down Investments

We regularly help people start with no money for a project.

BRRRR rental properties work great for this. Investors can invest in them without putting any money into the property purchase or the flip.

Another way we frequently see people succeed with zero down is when they have really, really good deals. It’s a rare find, but if you do come across a property for sale for 60% or lower of the ARV, you can get 100% financing. Smaller, local hard money lenders will jump at the opportunity for such a great deal.

How Much Money Should I Normally Expect to Bring In to Start?

Traditionally, when you’re starting out investing, you’ll use either hard money loans or a bank finance. It depends on your credit score and the amount of money you’re able to bring into a deal.

When you’re going into these loans, it’s good to expect to pay between 10% to 20% of the total cost of the project out-of-pocket. This includes 10% to 20% of the property purchase and 10% to 20% of the fix-up costs.

As an example, say you have a $100,000 purchase that will require a $50,000 rehab budget. If you’re bringing in 20%, you’ll need $20,000 as down payment for the house, plus $10,000 to cover construction – so $30,000 total out-of-pocket to start.

What Will My Financing Depend On?

How much you as a new investor will need to bring into a deal will depend on several factors:

  • The kind of deal you find
  • Your qualifications – with or without real estate experience
  • Your income
  • Your savings
  • Your credit score

Hard money lenders tend to lend based on your deal. Banks tend to lend based on you. A higher credit score will give you better chances at bank loans. And banks love lending to those who don’t need money. So if you already have a lot of savings and income, you can get 100% financing. But the more you put in, the cheaper it’ll be.

Overall, you can get involved in real estate investing with no money, especially for rental projects. But if you really want to get a running start, you’ll need some money for your investments.

Read the full article here.

Watch the video here: