Tag Archive for: hard money basics

How To Guarantee Profits in Real Estate Investing

Real estate isn’t a guessing game. Here’s a step-by-step guide of how to guarantee profits in real estate investing.

As a hard money lender, we want to see you actually make money on a flip.

We know firsthand that education is the first step to profit in real estate investing. Many people come to us with a fundamental misunderstanding of the numbers.

Any seasoned real estate investor can tell you: these numbers are all really simple. You just have to practice them. The more you understand, the higher your profits. There’s money in the money.

Don’t be scared off by the math involved in investing. Repetition is key. We’ll walk through the simple numbers, and show just how easy it is to guarantee profits in real estate investing.

The Fundamental Numbers

Let’s go through a simple deal analysis.

You’ll need to do a little research to find the numbers to plug into this equation. You can get most of this information from:

  • The listing/seller
  • The lenders you may work with
  • Real estate communities (like Bigger Pockets, or local Facebook groups)
  • Simple market research on sites like Zillow
  • Your personal experience over time

We’ll walk through each number in our example step-by-step.

ARV & Purchase Price

After-repair value (or ARV) is what you can anticipate selling a property for after you fix it up. For our example, we’ll say our ARV is $200,000. Meaning, we can get $200k for this property when we go to sell.

Next is purchase price. This is the contract price – how much you bought the property for. In our example, the purchase price is $120,000.

Closing & Loan Costs

However, the purchase price does not include the closing cost. Beginner investors often fail to consider these.

Closing costs are what you owe the title company for closing the contract, plus the fees on the loan itself.

The title will be around $2k or $3k. Closing fees, appraisals, etc for your lender will be based on your loan amount – somewhere between 2 and 3 points. For all the closing costs, we’ll say $8,000 total in our example.

Rehab & Insurance

The next crucial number is rehab costs. What’s a realistic budget to make this property one someone would buy for $200k? For this example, we’ll low-ball a bit. Let’s say we already have some materials on-hand, and we’ll do a bit of the work ourselves. We estimate to fix up the home for $20,000.

Property insurance is the next cost to consider. Most lenders require property insurance in the case of theft, fire, weather damage, vandalization, or any other unexpected loss of property. We’ll say the insurance for our example will cost us $2,000.

At this point, all our costs add up to $150,000. Typically, people who come to us get about this far. They say, “We can finish this project for $150k and sell for $200k. That’s $50,000 in equity. All profit!”

But those people fail to factor in some final important payments: what it costs to hold and then sell the property.

Holding Costs

Between interest, mortgage, insurance, HOA, utilities… What’s the monthly cost to keep the property while you fix it up?

It depends how long it takes to complete and sell. Rehab can take anywhere between 2 months and 6 months. For our example, let’s say we hold for 4 months.

This number is impossible to calculate perfectly, but on average, you can estimate holding costs to be about 1% of your sale price every month.

Our 4-month hold works out to 4%, or $8,000 total.

Fees at the Sale

Once you go to sell, you now have realtors involved – both on your side as a seller and the buyer’s side.

Typically, the high end of realtor fees are 6%, occasionally as low as 4%. We’ll go with the high end for our example, and say these fees will cost us $12,000.

Also, you’ll have more closing costs on the sale of the house. There are some tricks investors can use here to lower the price, like doing a hold open. Let’s say this will cost us $3,500.

Total Fix-and-Flip Costs

We’ve finally factored in all the costs of our example property. In total, this fix-and-flip would cost us $173,500.

It’s vital to factor all costs in number when you’re doing the math if you want to guarantee profits in your real estate investing.

With a $200,000 ARV, our anticipated profit would be: $26,500. Not bad at all for a $200k house.

Calculations to Quickly Guarantee Profits in Real Estate Investing

There are a few quick calculations you can do to find out if a property is in the profit range or if the squeeze is too tight.

Start with your sale price. 100% of our example’s sale price is $200,000. What we want to know is:

  • What percentage of that number should your other costs be in order to guarantee a profit in a real estate investment?

Purchase Price & Rehab

In real estate investing, it’s typical to have your purchase price below 70% of the ARV. (Keep in mind – the last few years have not been a typical market. Buyers had been overpaying, and leverage was easier to find. Don’t base your expectations here on the market from the last 2-3 years).

If your purchase price and rehab costs are around 65% or 70% of the after-repair value, it’s likely the flip will profit.

Closing & Loan Closing

The loan fees, closing costs, insurance, etc should cost somewhere around 5-6% of the ARV, at the high end.

It’s an important cost-saving measure to make sure you have some control over the insurance, maybe with a blanket policy. A great credit score can also cut these costs down pretty drastically.

Holding Costs

Holding costs can truly trap flippers in this market. However, as long as you buy good properties and do good rehabs, we’re still seeing houses sell quickly.

Most fix-and-flips that get stuck on the market are because:

  • They’re at a higher price point (and buying power is low).
  • The investor didn’t do their due diligence.
  • The quality of the rehab is poor.

Ideally, you’re getting the house ready to sell in less than 6 months. So holding costs shouldn’t cost any more than 6% of your ARV.

Realtor & Closing Fees

As we shift into a buyer’s market, realtors become more and more important. It’s possible to negotiate with realtors, but these costs should stay around 4-6%.

You can also expect around 1.5% of the ARV for the second batch of closing costs.

How to Calculate Profit Based on Percentages

If you can estimate your costs’ percentage of ARV, you can guarantee profits in your real estate investment.

The percentage of costs added up have a direct impact on the percentage of profit leftover for you:

You should always aim for a minimum of 10% profit on a flip. The 10-15% range is even better.

In the example we’ve been using, our number for costs comes in at 86.75%. The leftover is profit, so 13.25%.

Floor vs Ceiling

Ideally, calculating these numbers gives you a floor – the bare minimum of what this property could earn you.

Then you’re left to find out the ceiling. As you gain more experience in real estate investing, you’ll find new ways to save money. Maybe cutting a little from purchase price, having a more efficient rehab, selling for a little over the ARV.

Not only can you guarantee your profits in real estate investing, you can make them skyrocket.

Sticking to the Numbers Guarantees Profit

Learn these numbers and stick to them. The number one way beginner real estate investors fail is that they go by emotions instead of math.

If you buy a property because it feels like it will work, or because you like it… You’ll probably lose money and hate real estate investing.

We want to see you try real estate investing and stick with it.

Visit our YouTube channel for more free info on real estate investing. 

And reach out to us if you need help running through the numbers on a property. Send us an email at Info@HardMoneyMike.com.

Happy Investing.

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Hard Money Loans – Know the Basics

As a beginner investor, you need to know the basics about hard money loans.

The two most basic hard money answers you need are:

  1. What’s the difference between loan-to-value and ARV?
  2. How do you calculate them?

Know the Basics: Loan-to-Value

Firstly, what’s Loan-to-Value? Loan-to-value, or LTV, involves the:

  • appraised value of a property
  • as it sits right now
  • with nothing changed about it.

As a real estate investor, if a property costs $100,000 as it sits, you know you’re going to put work into it and make it worth more. But that as-is value, the $100,000, is what lenders base their loan amount on.

Know the Basics: After Repair Value

Secondly is After Repair Value. After repair value (ARV) is used more by hard money lenders and the real estate investment world. Banks and traditional lenders more often use LTV.

Because in real estate investing, we’re basing our numbers on what you can do to the property. What can the value be once you fix it up? That’s the number that determines profit, so that number is more important for hard money lenders.

ARV is the target value of what the house will be worth after all your renovations. This ARV should always be higher than the current price of the house when you buy it.

Calculating ARV and LTV for Hard Money Loans

Let’s say you found an undermarket property that’s selling for $100,000. If a lender says, “We’ll loan you 75%,” that could mean two things, and you’ll want to know the difference.

First, if they’re a bank, they’re likely talking about 75% of the value. In this example, that would be:

$100,000  ×  75%  =  $75,000 loan

Hard money lenders will care more about the value of the home after repairs, so they go off ARV. If they loan you 75%, that would be:

$150,000  ×  75%  =  $112,500 loan

If a loan is based on ARV, lenders might want to know – what are you doing to the property? Different renovations will affect the value of the property in different ways. What you will do and the quality of your work will affect the ARV.

When you know the basics about LTV and ARV, your hard money loans will be much smoother.

Read the full article here.

Watch the video here:

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Hard Money Loan Basics: Numbers to Know

The ultimate beginner’s guide to basic hard money loan numbers to know (AKA, your guide to wealth in real estate investing).

There’s money in the money when it comes to real estate investing. But the numbers surrounding hard money loans can be confusing, especially for beginners.

Many investors don’t want to learn these numbers. Just by reading this guide, you’ll be way ahead of the game.

Let’s go over these basic numbers to get you one step closer to being a real estate expert:

Hard Money Loans – Knowing the Basics

As a beginner investor, you need to know the basics about hard money loans.

The two most basic hard money questions you need to know the answers to are:

  1. What’s the difference between loan-to-value and ARV? 
  2. How do you calculate them?

Know the Basics: Loan-to-Value

Loan-to-Value, LTV, involves the:

  • appraised value of a property
  • as it sits right now
  • with nothing changed about it.

As a real estate investor, if a property costs $100,000 as it sits, you know you’re going to put work into it and make it worth more. But that as-is value, the $100,000, is what lenders base their loan amount on. 

Know the Basics: After Repair Value

After Repair Value (ARV) is used more by hard money lenders and the real estate investment world. Banks and traditional lenders more often use LTV.

Because in real estate investing, we’re basing our numbers on what you can do to the property. What can the value be once you fix it up? That’s the number that determines profit, so that number is more important for hard money lenders.

ARV is the target value of what the house will be worth after all your renovations. This ARV should always be higher than the current price of the house when you buy it.

Calculating ARV and LTV

Let’s say you found an undermarket property that’s selling for $100,000. If a lender says, “We’ll loan you 75%,” that could mean two things, and you’ll want to know the difference.

First, if they’re a bank, they’re likely talking about 75% of the value. In this example, that would be:

$100,000  ×  75%  =  $75,000 loan

Hard money lenders will care more about the value of the home after repairs, so they go off ARV. If they loan you 75%, that would be:

$150,000  ×  75%  =  $112,500 loan

If a loan is based on ARV, lenders might want to know – what are you doing to the property? Different renovations will affect the value of the property in different ways. What you will do and the quality of the work will affect the ARV.

Know the basics about LTV and ARV, and your hard money experience will be much smoother.

Hard Money Loan Requirements

What are the requirements for a hard money loan?

What will hard money lenders lend you, and what does it take to get it? Knowing these numbers in advance will help you stay on track to getting profitable deals.

The majority of hard money lenders will lend up to 75% of the ARV. 

So, let’s say a property will be worth $100,000 after all repairs, and a lender offers you 75% of that ARV. You’ll receive a loan for $75,000.

Is that enough? Now it’s up to you to crunch the numbers and see if you meet these hard money loan requirements. Will that $75,000 cover everything – the purchase, the rehab, etc.? And if it doesn’t – how much do you need to bring in? Can you make that work?

What Expenses Does a Hard Money Loan Cover?

A hard money loan covers:

  1. The purchase of a property.
  2. The rehab of that property.

100% financing is possible with a hard money loan, but it’s dependent on a lot of things – your credit score, investing experience, relationship with the lender, and more.

Let’s see an example of how the numbers on that $75,000 loan could work out to cover the flip 100%:

Loan:  $75,000

Purchase Price:  $50,000

Rehab: $25,000

If it’s possible to keep rehab costs at $25,000, you could get this $50,000 property 100% financed by a hard money loan, if the ARV is $100,000.

But let’s say rehab ends up costing $35,000. The total cost of the project would be $85,000, but your loan only covers $75,000. You’d have to come up with that extra $10,000 somewhere else – either from an alternative lender or from your own pocket.

Know the numbers to help you plan ahead with your hard money loan. If you know up-front that rehab will cost $35,000 on this property, you’ll know to only go through with the deal if you’re able to bring in that additional $10,000.

The 75% Rule Hard Money Loan Requirement

You can learn ahead of time whether your project can be 100% covered by a hard money loan. Just follow the 75% rule: make sure the costs of your project are under 75% of the property’s ARV.

Hard Money Loans Calculations

We’ve gone over some of the basics, but there are a few more hard money loans calculations to know.

Hard money lenders – especially national lenders – have two important numbers they go by. 

First, 75% of the ARV is the maximum they’ll lend you.

Second is a more specific breakdown of how that money will be used, usually referred to as 90/100 or 80/100.

Know the Numbers: What Is the 90/100 Number in a Hard Money Loan?

This number is usually around 90/100, but lenders can tighten down to 80/100 or lower. But what does this number mean?

The first number is the percentage of the loan that goes toward the purchase. The second number is the percentage that goes toward rehab. The higher the numbers, the less of your own money you have to put down.

In the case of 90/100, that means your loan will cover 90% of the purchase and 100% of the rehab.

But whatever that calculation is, it still has to be less than 75% of the ARV. Here’s an example

90/100 Calculation Example

Let’s use the numbers from our last example to look at a 90/100 loan. We’ll take 90% of the purchase price.

Purchase Price: $50,000

50,000  ×  90%  =  $45,000

So, $45,000 of your loan must go toward the purchase of the property. But since it costs $50,000 total, you’d have to bring in the additional $5,000.

Rehab: $25,000

25,000  ×  100%  =  $25,000

So, $25,000 of the loan will go toward rehab. That covers all of it, so you wouldn’t need to put any of your own cash into repairs.

So what would this 90/100 loan cover total?

$45,000  +  $25,000  =  $70,000

90/100 vs 75% Rule

But wait, that 90/100 loan example only gave you $70,000. The 75% rule on the same property said you could get a $75,000 loan. So which is it?

The 75% rule (hard money lenders loaning 75% of the ARV of a property) isn’t a guaranteed loan amount. It’s the maximum loan amount.

This maximum rule becomes more relevant as the deals get riskier.

Lenders don’t like risky deals because there’s a good chance you’ll lose money or only breakeven. 

Here’s how our previous example could become much riskier and the 75% rule would become more important:

Let’s say we have that same property with an ARV of $100,000. But this time, the purchase price is bigger.

Purchase Price: $60,000

Rehab: $25,000

Now, let’s apply the 90/100 principle:

60,000  ×  90%  =  $54,000 loan for purchase

25,000  ×  100%  =  $25,000 loan for rehab

Total loan amount  =  $79,000

So if a loan covered 90% of this purchase price plus all of the repair costs, the total loan would need to be $79,000.

But the 75% rule says your max loan for this property with a $100,000 ARV can only be $75,000. So, in this case, you’d get the loan for $75,000, and be stuck bringing in that extra $4,000 the loan didn’t cover.

Why the 75% Rule?

The 75% rule protects you from the other costs from your project. You’ll still have to pay for selling costs, overhead, and loan fees. Yet you’ll still want at least 10% – 15% profit.

If your loan by itself is any more than 75% of your ARV, you’d be set up to make little to no money.

Lenders want to stop you before you get started if they can see there’s a good chance you won’t make a profit. They want to encourage good deals, and discourage deals people won’t be able to follow through on.

The bottom line: remember there are two numbers. The 75% rule is the maximum amount they’ll lend you overall. The 90/100 (or 80/100, etc) tells you the amount of the loan they’ll allocate to purchase and rehab.

What If I’m Still Confused?

These hard money calculations, numbers, and requirements can be overwhelming if you’re not used to them. Luckily, you don’t have to memorize all this stuff right off the bat.

Download our deal analyzer here. With this spreadsheet, all you have to do is enter the numbers. It does the math for you to help you decide whether to pursue your deal, and how much money you’ll have to bring in if you do.

A tool like this can help you know the numbers before you go to your hard money lender. Life is easier for everyone, and more profitable for you, when you know the numbers of a hard money loan.

Calculating Hard Money Loans for BRRRR

If you’re looking at the rental side of real estate investing with BRRRR, what are the numbers you need for a hard money loan? What do you look for in a profitable flip?

BRRRR was designed to let investors get into rental flips with almost no money down. How do you do it? The 75% rule.

What does that mean, and how do we calculate it?

With BRRRR, there’s two loans involved. The first (hard money) loan is to purchase and fix up the property. And the second (bank) loan is to refinance for the long term.

To make the BRRRR process happen with no money down, you have to know ahead of time that you can keep costs under 75% of the ARV.

The Math on a BRRRR Hard Money Loan Using the 75% Rule

75% of what your property will be worth (ARV) is your cap for costs.

Let’s say you’re buying a property, and based on the neighborhood, comps, and all other appraisal considerations, the ARV is $200,000.

Using the 75% rule would give us:

200,000  ×  75%  =  $150,000

Your hard money loan could be up to $150,000. This means if all your costs for the project stay under $150,000, you don’t have to bring any money in. 

With this example, it would be doable:

Purchase Price: $125,000

Rehab: $25,000

Total cost: $150,000

If you could keep rehab costs at $25,000 for the project, all costs would be equal to the 75% ($150,000) loan we’d receive.

If we take the same example, but the purchase price was $140,000 with $25,000 of rehab costs, you’d end up putting in $15,000 of your own money. Still doable, but more expensive.

100% BRRRR Financing in the Future

As the economy turns and we begin to see more foreclosures, BRRRRs will be a great opportunity to build up a bigger real estate portfolio with no money down.

The opportunities are out there, but to do it, your costs have to be at 75% or lower. This number might tighten in the near future to 70%, but all the same rules still apply.

If you know your numbers before you buy, you can use a BRRRR hard money loan to your full advantage with zero money down.

Hard Money Calculator

A hard money calculator is another important tool to help investors know the numbers of a hard money loan.

Beginner and experienced investors alike need to know the difference between loans offered by different hard money lenders.

How Does a Hard Money Calculator Work?

Some lenders will charge higher interest rates with no points. Some will charge higher points, which are percentage points taken out for fees, but have a lower interest rate.

The numbers get complicated fast. How can you compare all this for your specific deal?

The best way to figure out these numbers is to use our loan optimizer, with a free download here

With this loan optimizer, you insert all the numbers – the loan amount, required down payment, interest rates, points, fees, etc –  from up to three different lenders. Then the calculator does all the math to show how much each loan would actually cost. 

It’s a simple way to compare lenders in your area and find the best price.

Example of a Hard Money Loan Calculator

Finding the cheapest loan for your deal can save you thousands of dollars on your project.

(Note: It’s good to shop around to find the best numbers, but don’t shop around forever! Or else you’ll never get to know a lender well enough to get preferential treatment.)

Here’s a walkthrough of how a loan optimizer might compare two lenders:

Loan Amount

Let’s say for a potential deal, you need a loan for $150,000. Both lenders we’re comparing are going to give you that full amount:

Lender A: $150,000. Lender B: $150,000

Interest Rates, Points, and Their Costs

But let’s say Lender A and Lender B have different rates (interest rate) and points (percentage taken out for fees).

Lender A: Rate 9.75%, Points 2.5. Lender B: Rate 14%, Points 0

Many beginner investors look at this and think, “Well, I don’t want a lender with so many points. I don’t want to just be paying fees.” But they fail to actually do the calculations. You’ll be surprised which loan will save you the most money. 

A loan optimizer will calculate the cost based on these rates and points:

Lender A: Daily Interest $406.25, Cost of Points $3,750.00. Lender B: Daily Interest $503.32, Cost of Points $0

As we can see, the daily interest combined with the cost of the points makes Lender B look like the cheaper option so far.

Other Fees

But there’s one more crucial cost we still need to take into consideration. 

Often, lenders who charge zero points up-front end up charging a lot of “junk fees” later. Here’s the example of Lender A and Lender B with all the extra fees highlighted:

Fees. Lender A: Processing $884, Appraisal $0, Credit $0, Escrows $0. Lender B: Processing $1,500, Appraisal $650, Credit $50, Escrows $125 per draw

The various fees charged by Lender B add up quickly, making Lender A suddenly look a lot better.

Final Costs

But let’s check with a final calculation which lender would be the cheaper choice:

Lender A: Total Cost of Funds $12,962. Lender B: Total Cost of Funds $13,408

Here’s our final calculation by our loan optimizer. By the end of the six months, we’d be paying $12,352 to Lender A, or $13,408 to Lender B.

So, Lender A, who had more points up-front, is the cheaper option – by over a thousand dollars!

Yet, if we’d judged these lenders based on our first impression of interest rate and points, we might not have gone with Lender A.

This is why it’s always important to use a loan calculating tool when shopping for hard money lenders. Know the hard money loan numbers – it can be simple! Click this link for the free download of our loan optimizer.

Know the Numbers of a Hard Money Loan

When you know the numbers, you’ll pick more profitable deals and cheaper loans.

There’s money in the money. There’s money in the numbers.

But you probably won’t become an expert in the numbers overnight.

Reach out to us at HardMoneyMike.com with questions about your deals, or with general questions about hard money numbers.

Happy Investing.