Tag Archive for: new investor

Why Do Lenders Sometimes Reject Your Real Estate Investment?

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It’s important to learn about what lenders consider ‘bad deals’ so that you can avoid those pitfalls and get the money you need for your real estate investment!

As a lender, our #1 goal is to make sure our investors are putting money into strong projects with relatively guaranteed returns. It’s in everyone’s best interest to be critical of questionable deals so that no one ends up in the hole.

Especially if you’re a new investor, you can learn a lot by talking to your lenders about what they’re looking for and how they determine the strength and safety of a real estate investment. 

Today, let’s dive into some of the red flags that could get your investment rejected by a lender:

1. Tight Margins

Lenders look for a minimum 15% profit margin. 

This means you’ll ideally need a loan for somewhere between 70-75% of the After Repair Value (ARV). That gives you a 25-30% buffer to cover interest, closing costs, and maintain that 15% profit margin.

A loan that crosses into 80-85% ARV territory is too close for comfort. With that large of a loan, your margins are slim, and the likelihood you’ll turn a profit gets increasingly unlikely.

Especially if you’re a new investor, you can feel a lot of pressure to get in the door and get moving. However, our 25+ years of investing experience has shown that it’s far better to do 1-2 good deals a year than 4 bad ones that could potentially lose you money. 

Be patient and critical. Selecting projects with a comfortable profit margin of 15% or higher is a much safer investment than one that needs a 85% ARV loan.

Lenders want to see you make money. If you’re not making money, then your investment career will be short lived, and lenders want to see you set up for future projects.

2. Fuzzy on the Numbers

When you meet with a lender, you need to demonstrate that you understand how the numbers and money fit together. Show your lender that you understand…

  • ARVs
  • Scope of the project
  • Purchase price

If you’re fuzzy on the numbers, it’s a red flag for lenders. 

The less you know, the more risk your lender takes on by giving you money. Even if the deal has a good profit margin or ARV, if you can’t articulate and explain that, it’s a bad deal for your lender.

Take time to understand your own numbers. Be able to defend it as a good real estate investment! 

It’s okay to ask questions and do research—you’re always welcome to reach out to us with your questions! 

But do all that learning before you’re in a meeting, asking to borrow money.

3. Dishonesty

If you lie to your lender about anything, expect them to decline your deal the moment they find out.

It’s far better to be honest—about bankruptcy, foreclosure, credit card debt, savings, etc.—than to wait for us to find out.

Lenders need to be able to trust you, so don’t hide information from them.

If you’re a new borrower, it can be tempting to inflate your expertise, even to pretend you’ve done this before. Be honest that you’re starting out, but then show them that you understand the numbers and are prepared.

Dishonesty can ruin your reputation and relationship with a lender. 

Even if there’s information you’d rather sweep under the rug, it’s better to be 100% honest.

The Bottom Line

At the end of the day, most lenders (including us!) want to work with honest people who know their numbers as they build wealth through real estate invesment.

In the current economy, banks are offering fewer loans, so building good relationships with smaller lenders is increasingly critical for successful investing.

If you have a deal you want us to look at, reach out to us at Info@HardMoneyMike.com. We also offer many tools and loan options that can help you learn more about investing.

Our goal is to partner with you so that all parties come out on top.

Visit our YouTube channel for educational videos about real estate investing.

Hard Money vs. Private Money Loans: What’s the Difference?

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Sometimes these terms are used in similar situations, but what actually makes private money loans different from hard money?

One of the most beautiful and attractive aspects of real estate investing is its accessibility.

Anyone can enter the game and create wealth, provided they understand their available options and use other people’s money (in the form of loans, etc.) to fund their projects. This is called using leverage.

The best leverage for each deal might be a little different. Sometimes you need to close quickly. Sometimes you need to prioritize low interest rates. 

Whatever the top priority, private money and hard money are tools to have in your investing toolbox.

Private Money Loans vs. Hard Money Loans

Hard money loans have been around for a long time, but recently we’re seeing a rise in private money loans.

Knowing the differences between the two can help you find the best deal for the specific needs of your project.

1. Credit Scores

  • Hard Money: Credit scores aren’t typically a factor. 
  • Private Money: Score based.

Instead of looking at your credit score, hard money lenders look at your financial history for things like bankruptcy, foreclosures, etc. 

Additionally, not only is hard money not determined by your credit score, but hard money loans can also be used to help fix your credit score (something that private money isn’t necessarily designed to do).  

If you have concerns about your credit score, check out our information about usage loans.

2. Flexibility

  • Hard Money: Super flexible and great for unique projects! 
  • Private Money: Less flexible, often better for larger communities.

If you have a project that’s a bit outside of the box, hard money is often the way to go since these loans aren’t restricted as much as traditional bank loans.

In contrast, private money tends to be best for projects that are a bit more “typical” in real estate investing. It can be tricky to get private money loans below $125,000, so if you’re looking for a fast, small loan, hard money might be a better deal.

3. Loan to Value

  • Hard Money: Up to 100% financing.
  • Private Money: Typically maxes out at 70% of the repair value and 90% of the purchase.

Sometimes you can find private money loans with great terms, but typically hard money can offer higher LTVs.

4. Markets

  • Hard Money: Local.
  • Private Money: National.

Private money has the advantage over hard money when you’re looking in larger communities. Most hard money lenders have smaller areas (or two or three states) they specialize in, and they like to stay focused on those areas.

5. Pricing

  • Hard Money: More expensive.
  • Private Money: Less expensive.

If you’re in a large city, and you’re looking for the best pricing, private money will typically be less expensive than hard money. 

It’s important to note that the difference in cost between these loans is often in the points, not the rate. 

Often, hard money loans are anywhere between 2 and 3 points, with loans around 6-9 months. In contrast, private money loans are often closer to 1-1.5 and offer longer loans of 12-18 months.

Which Loan is Better?

It depends what you need!

If you need a flexible, quick loan with higher LTVs that isn’t going to penalize you for a less-than-spectacular credit score, hard money is the way to go.

If you need longer terms, better points, and something that’s designed for larger communities and typical projects, check out private money loans. 

Explore Our Resources

Real estate investing is great, and both of these loans should be in your investing toolbox. 

If you want to explore a hard money loan, feel free to contact us at Info@HardMoneyMike.com. We’re always happy to talk through a deal or help you figure out what sort of loans are right for you.

You can also check out the free tools on our website or our YouTube channel where we offer investment tips and tricks. Our #1 goal is that you feel confident and equipped to succeed as a real estate investor. 

Happy investing!

How to Use Escrow for Your Real Estate Deals

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If you’re new to the real estate game, learning how to use escrow is a critical step towards success.

Everyone in the fix and flip game is likely going to encounter escrows.

A popular strategy is to use private (or hard money) loans. These can be helpful because they can fund up to 100% of your rehab and are super flexible.

The tricky thing (and where escrows come up) is that a lot of lenders require that you start the project with your own money, reimbursing you later through escrow.

This can become a problem for beginning real estate investors if they’re not prepared to pay that much on the front end. 

Where do you get the money? How and when do you actually access the escrow funds?

How Does Escrow Work?

Think of escrow as a reimbursement program. Lenders lock a certain amount in the escrow fund and you submit draw requests throughout your project.

You’ll likely need an additional $50,000 (from your own pocket) to get the project going to submit the first draw (essentially, reimbursement) request. In order to keep things moving, you should also try to have pocket cash for the second draw as well.

It looks a bit like this:

Week 1:

  • Put your own money in to start project
  • At the end of the week, submit your 1st escrow draw to your lender

The lender might take some time to go through their verification process, so you should prepare for a week two along these lines:

Week 2:

  • Lender begins reviewing 1st draw request
  • You keep moving forward with your project, paying with your own money bucket
  • At the end of the week, you submit your 2nd draw request
  • Lender reimburses 1st draw and begins reviewing 2nd

Hopefully after the first two draws, you won’t need any more out-of-pocket cash. 

Also, remember that those initial draws are covered, you just need the money up front, and then they reimburse you out of escrow. 

How to Get Initial Funds to Access Escrow

You need a full money bucket – a supply of personal funds you can use for those out-of-pocket expenses.

How can you make sure you’re money-prepared before you get into this? 

1. Business Credit Cards

If you can, get business credit cards. Business cards are a great way to protect your personal credit score. Also, if you’re smart about choosing a 0% card, you could go through the whole process without paying any additional interest.

If you have questions about setting up your business credit cards, check out The Cash Flow Company, our sister company that specializes in money-preparedness.

2. Lines of Credit

We recommend business lines of credit or, at the very lest, HELOCs on your home. The most important thing is to keep your projects going, and having a variety of lines of credit is going to help.

To learn more about bank lines or HELOCs, check out this article from The Cash Flow Company.

3. Other People’s Money (OPM)

You can look to family, friends, neighbors, acquaintances, anybody out there who’s looking to put some money to work. 

Even smaller amounts like $25,000 will make a significant difference, and you can offer a better rate than larger banks.

OPM is a crucial piece of filling your money bucket for those initial draws, and it’s also a relatively safe investment for people around you.

4. Gap Funding

Gap funding refers to any loan you get to fill a gap in your project. 

Lenders still look for security in the loan, but if you’re able to show security, gap funding is another possibility for paying for those first escrow draws. 

Hard money loans can often be used as gap funding, and you’re welcome to reach out to use if you want to discuss a deal with us at Hard Money Mike.

You’re Ready to Use Escrow Funding!

Having a full money bucket at the front end makes a huge difference in your success as an investor. Markets move fast, and stalled projects can end up costing more than they’re worth. 

These strategies can fill your money bucket and help you access escrow quickly and successfully.

If you have any questions, feel free to reach out to us at Info@HardMoneyMike.com. You can also contact our sister company at Info@TheCashFlowCompany.com to discuss business credit cards or other aspects of being money-ready.

Also, check out the free tools, calculators, and information on our website. Our only goal is to help you be successful on your investment journey.

Happy investing!