Tag Archive for: real estate funding

How to Get That Property Done: The “Finish a Project” Loan

4 “finish a project” loan case studies.

One of our most popular loans is what we call a “finish a project” loan.

We call it that because… That’s exactly what it does! We want to help you finish your real estate project no matter what comes up.

Local hard money lenders like us are different than private money or banks. We finance things no one else will.

Let’s go over a couple examples of how this loan has worked with our past clients to see if it’ll fit with your current project.

Finish a New Construction Project

Once a new build is started, banks don’t like to give out more loans partway through. This is the situation our client James found himself in.

He was building a house for himself. After he bought the property and got started, he became boxed in and ran out of money. He told the bank, “I have a property on five acres. It’s going to be worth $800,000. I only need $250,000 to finish it.”

But none of the banks would lend to him, for several reasons:

  • The project had already begun. Banks never like funding a project that’s already started.
  • His income didn’t meet their requirements. The property itself didn’t matter to the bank because James’s income was lower than they were willing to lend to.

So, James came to us instead. The project was only stalled because of money. He needed the $250k to finish the project in 5 to 6 months so he could get his family out of the trailer they were staying in on the property in the meantime.

Here’s what we did: we gave him the money out in escrows, or draws. He got $70k from us up front, then another $70k later, then another $80k, and so on.

We didn’t need to pull his credit score, scrutinize his income, and make sure he checks every box. We just needed the property to CO.

Finish a Bootstrapped Project

When any sort of flip is sitting stale for too long, sometimes the owner needs extra outside money to get things moving along so the property will start generating income.

Our client CW was a realtor who was finishing a project by turning a traditional rental into a short-term one. He had been bootstrapping the project (aka, funding it from his own resources).

His funds were slowing down with the change in the market, and Airbnb season was quickly approaching for the area. He needed a last $50k to finish the project.

So, he came to us, and here’s how it worked for him:

  • He kept his mortgage on the property.
  • We gave him $50,000 in a second-lien position on the same property.

He was able to get the house finished up and fully booked out for 6 months – generating plenty of income to pay off his loan with us.

Finish a Project That Goes Over Budget

With certain types of loans, banks can halt part of the funding if the project goes over budget. Here’s how it played out for our client John.

He had a construction loan with a bank. It was a great deal: they gave him all the money to build the property, then in the end it converts into a permanent loan at 3%.

However, he went over budget… so the bank stalled it. He needed $60k to get the project back on track and keep that 3% loan.

Here’s how John did it:

  • We gave him $60k.
  • He finished the project.
  • He could lock in the 3% bank loan for a 5-year term.
  • He took out a HELOC and paid off his loan with us.

Finish a Flip!

This fourth “finish a project” loan is our most common: working with fix-and-flippers.

Our client, PS, had a flip. Or rather, he had too many flips going at once. This one had been sitting for over 6 months, and he just needed $25,000 to finish up the rehab.

For those 6 months, this property was eating up funds. He was making mortgage payments, hard money interest payments, taxes, utilities, and everything with zero inflowing cash.

He had another hard money loan on the property, so we were able to come up behind him and get him the $25k.

Within 3 weeks, the project was complete and put on the market. Four weeks later, it sold, and he paid both loans off.

Why We Do These Loans

Big lenders won’t do deals like this for you. But as long as we’re in a safe lien position, we love being able to help you with these project finishes.

A couple of tens of thousands of dollars right when you need it can save you years of financial recovery.

Do you need a “finish a project” loan? Feel free to reach out at Info@HardMoneyMike.com. We’d love to see if we can help.

Happy Investing.

The $1.8 Million Dollar Mistake: DSCR Loan Interest Rates

DSCR loan interest rates vary like crazy. Here’s exactly how to avoid a costly mistake.

DSCR loans are unlike any other loan out there.

Traditional loans are standard – every lender will have the same interest rates, terms, points, and closing costs. There is one system, one set of brackets that decides loan prices, and one approval process.

Not so with DSCR loan interest rates and other terms. This style of loan is the Wild West of underwriting.

With so much variance between DSCR loans, it’s more important than usual to shop between lenders. Let’s go over the $1.8 million mistake some investors make with DSCR loan interest rates.

Current DSCR Loan Interest Rates

We’d like to share a couple of examples we see in the DSCR loan world.

As a mortgage broker, we have a program that allows us to look at different rates from different companies. Every day, 10 to 15 different lenders put their rates on this search engine.

We search the same information daily to get a picture of the rates on these loans. We put the same:

  • Credit score
  • Debt service coverage ratio
  • Loan-to-value

Yet every lender offers a different rate. On the same 30-year DSCR loan, interest rates have looked like this:

  • The best: 7.04%
  • The worst: 9.46%
  • The average: 7.9% – 8.25%

These differences are not based on credit score, experience, property size or type, or debt ratio. These are the options for the same person calling around for the same deal. They could find anywhere between 7.04% and 9.46% – all depending on the lender.

The DSCR loan market is extremely segmented. And that is why it’s vital to shop around.

We want to break down the difference in DSCR loan interest rates for you. How much money do you lose on the worst DSCR interest rate vs the best?

How Much Different Interest Rates Cost You

Let’s say we have a $300,000 deal we want a DSCR loan for. We’ll look at 3 common interest rates: the high end (9.46%), the low end (7.04%), and the average (7.99%).

In this example, we have the same credit score, same rent income, same property expenses, and the same loan amount. These interest rate differences are purely about the lenders we’re using.

Low-End DSCR Interest Rates

With the lowest available rate, 7.04%, on a $300k, 30-year loan, payments are $2,003.

At the exact same time, with the exact same parameters, a 7.99% interest rate (average range) has payments of $2,199.

So, this is a difference of $195. Doesn’t seem like a big deal? If your rent is $2,100, a lower rate could mean the difference between positive cash flow and negative – or qualifying for the DSCR loan or not.

High-End DSCR Interest Rates

What’s this comparison at the other extreme?

Lenders with higher DSCR loan interest rates are usually the ones who take advantage of the segmented nature of this market. They raise their rates high, then raise their marketing budget too. They push their product hard to be the first option borrowers see; when they don’t shop around, they’ll settle for the higher rate.

And with this higher rate, a 9.46%, your monthly payment would be $2,513. That’s $509 more per month than the lender with the 7.04% rate!

All for the same property, same LTV, same credit score, but different lender.

Impact on Real Estate Investors

The monthly cash flow difference from DSCR loan interest rates will hurt everyone’s pockets. However, it’s especially rough for investors. What happens if you have three properties? Five? Ten?

If you got stuck with a 7.99% rate for all of your investments (rather than 7.04%), that’s $70k extra in interest over the life of the loan. How does that multiply with more investment properties?

  • 3 properties → $210k extra in interest
  • 5 properties → $350k extra in interest
  • 10 properties → $700k extra in interest

Let’s make the same comparison with the higher-end interest rate of 9.46% compared to the low-end 7.04%. Over the life of the loans you’d be paying:

  • 3 properties → $550k extra in interest
  • 5 properties → $917k extra in interest
  • 10 properties → $1.8M extra in interest

That money is all additional interest that could have been avoided. It’s going into the bankers’ pockets because you didn’t shop around for a better rate that’s easily available.

But what exactly do we mean when we say shop around?

How to Shop Around for DSCR Loan Interest Rates

The spreads on DSCR loans are large. But shopping around for any large purchase is no fun.

When you’re talking with any sort of salesperson, it’s nerve-wracking to not know whether they have your best interest in mind. What if you don’t know what questions to ask to get the right information? What if they try to take advantage of you?

We want to give you a couple of questions to ask to get the information you need to make an informed decision on your DSCR loans.

Questions to Ask DSCR Lenders

Firstly, a piece of advice: if a company won’t quote you a general range in a simple phone call, then keep calling. Find the ones that will.

Secondly, prepare all of your information ahead of time, and be sure to give every lender the same information. You’ll want to have the following information ready before you contact anyone:

  • LTV
  • Credit score
  • Is it a purchase or refinance?
  • Zip code of the property
  • Type of property (single-family, duplex, etc)
  • Rent (or estimated rent)

Next, you’ll want to have a set of questions to ask each lender. Even if you don’t have the property yet, coming with a specific example gives you an idea of who the good lenders are.

What to ask DSCR loan lenders:

  • What interest rate could I get?
  • Is there a prepay penalty? How long is it and how much? (The pricing of a 5-year prepay will always be better than a shorter-term prepay. But if you know you’ll want to sell the property within three years, you’ll need to keep a shorter prepay in mind).
  • What are your closing costs?
  • What’s your appraisal process for underwriting?
  • Is this a 30-year product? 40-year? Interest-only?

How to Analyze the Price of Different Lenders

Now, once you have all the information and numbers from your different lenders, you have to make sure you’re comparing apples to apples. One lender may have a lower interest rate but an extra 1-2 points.

What’s important is the final number you’ll have to pay. You can download our free analyzer here for an easy way to figure that out.

We want to get you the lowest rate to keep your investment business turning. Rates have been fluctuating like crazy, though. 

If you want a regular report on conventional and DSCR loan interest rates, LTVs, credit requirements, and more, ask us about it at Info@HardMoneyMike.com.

Happy Investing.

Hard Money Lender vs Bank Financing: Why You Need Both

Which funding should you get? 3 case studies on a hard money lender vs bank.

In the typical real estate career, you follow this funding path:

  1. You use hard money because it’s all you can qualify for.
  2. With experience, you start qualifying for bank loans, so you move on from hard money.

What most people miss is a crucial third step:

  1. Now you have two valuable funding sources in your toolkit.

Most people view hard money as a stepping stone to “better” financing. While true in some ways, putting hard money in the past can make you miss out on some amazing opportunities hard money offers.

Let’s get over 3 examples of clients we’ve had who are far into their real estate career but still benefit from hard money. And lastly, we’ll go over how you can make that big step into bank financing.

3 Case Studies – When to Use a Hard Money Lender Instead of a Bank

We work with people who have been doing the investing game for 10 to 15 years… who still utilize hard money whenever they need it. Here’s what three of those people do and how they use hard money vs bank loans.

Mary: Cross Collateralizing with a Hard Money Lender

Mary is a developer who builds big homes here in Denver – anywhere between $2-4 million.

She has bank financing set up for the majority of the construction period. However, when she finds a lot or house she wants to scrape, it usually needs to close within 7-10 days. Her bank funding can’t work that fast.

So, she comes to a hard money lender to get the property quickly and with 100% financing. She cross-collateralizes (aka, uses her other properties) to make sure she gets full funding with us.

Once the property is approved through zoning and everything, her bank funding kicks in to pay off the hard money loan.

Jeff: Hard Money Lender a Solution to a Bank Limit

Jeff is a flipper who does about 4 or 5 projects per year here in town. They’re pretty good sized, ranging from $400k to $800k.

But his bank sets a limit, and he’s only able to do about two flips at a time with them. So when he has two projects going but finds a great deal, he’ll go to a hard money lender. Hard money frees him up to jump on a good property, even when his financing is tied up elsewhere.

TC: Hard Money Lender Is Faster Than a Bank

TC has been a longtime client of ours who also uses other financing too. He came across a deal where he was one of five bidders. On the very first day, he bid $30,000 less than everyone else because that’s what would fit his budget with construction and everything.

And he won the deal. Why?

Because he could also close in less than 10 days with a hard money loan. He didn’t need an appraisal, inspection, or anything else that prolongs the sale and gives sellers a headache.

Using a hard money lender instead of a bank was the only way he was able to get that property for 10% less.

You Need Both!

It’s not either hard money or bank loans. You need to use both.

At the end of the day, bank loans are almost guaranteed to be cheaper with interest rate and points. They should always be used when possible. But sometimes bank loans aren’t realistic – you need money now, or you lose out on a great deal.

Banks:

  • Cheaper, lower interest rates and fees
  • You get the entire loan upfront
  • Require a good credit score
  • Take longer upfront (closings can take 2-6 weeks or more)
  • Necessary for long projects

Hard money lenders:

  • More expensive, higher interest rates and points
  • Can take longer in the middle of the project to get funds from escrow
  • Lenient on credit
  • Fast closings (sometimes within days)
  • Flexibility
  • Great for short-term projects

Hard money lender vs bank? They both need to be valid funding options in your career.

How to Get Bank Loans for Real Estate Investing

It may be important to keep hard money in your back pocket, but you should always be moving toward acquiring bank loans. This cheap, long-term funding will fuel the majority of your career.

Here are the steps you need to take to make the leap from hard money to bank funding.

1. Be In Business for 2 Years

You need at least one of the following for bank loans:

  • A W-2 job that meets the income requirements (aka, investing is a side gig for you and you make plenty of money elsewhere).
  • Your business has been established for 2 years or longer.

If real estate investing is your full-time job, then you need to show that you have experience and income from it. In that 2-year span, you will want to complete at least 3 successful projects.

2. Have a Good Credit Score

Bank loans are highly credit score-driven. You’ll need a score of at least 680, but higher if you want better terms. This is something you should be working on now so it’s ready when you really need it.

If you struggle with your score because of credit usage from your business, check out this article for a solution.

3. Down Payment Funds

This can be a major obstacle for newer investors. Luckily, you have a lot of options for help with the (usually 20%) down payment for bank loans:

Find Investor-Friendly Banks

One last tip on the journey from hard money to bank loans: find the banks that like to work with real estate investors.

Most of the large banks, like Chase and Wells Fargo, will only work with a very, very select few investors. Instead, you should look at local banks and credit unions that offer investor loans.

Don’t bother barking up the wrong tree. Find a lender who wants to help real estate investors. As you move through your career and get your experience, start reaching out to find the banks in your area that love to work with investors. 

Need a Hard Money Lender vs a Bank?

Need a quick close, gap loan, bridge loan, or a fix and flip loan? Reach out at Info@HardMoneyMike.com

We can help you find unique funding that’s outside of the banking box.

Happy Investing.

3 Ways Banks Trap Real Estate Investors in Pricey Loans (and How to Get Out)

Credit, banks, and real estate investors: 3 traps and how to avoid them. 

As a real estate investor, you always want to minimize costs. This includes the costs of the money itself.

However, banks can trap real estate investors into paying more than they should. You could be paying 1-4% more in rates, 5-10% more on down payments, or could even be denied altogether.

These three traps all come back to what we call the usage circle. Let’s talk about what the usage circle is and how it affects real estate investors.

The Usage Cycle: How Banks Trap Real Estate Investors

Here’s how the usage circle goes:

  • A real estate investor uses their credit cards to keep a project going. They pay for materials, labor, expertise, and more on their cards.
  • They will pay the card off after the real estate transaction. When they close or refinance a deal, they’ll wipe the card back to zero.
  • But while they’re using the card, their credit score will drop. When they pay off the card, their score will go back up.
  • Banks still use the current, low credit score when they give you the loan.

And there’s the trap.

Using credit to buy the stuff that keeps your business going pulls down your credit score. But with a bad credit score, you can’t get the loans to keep your business going.

How Credit Usage Impacts Loans

Usage makes up 30% of your FICO credit score. When an investor is using a lot of their available credit, their score takes the hit.

The difference between a 679 and a 680 score can mean the difference between getting a conforming conventional investor loan or getting declined.

You’ll pay off your credit once you sell or refinance your investment property and your score will go back up. Banks know this, but they can’t take it into account. They have to use your current credit score when you apply – even if it’s only low because of high usage on business costs.

Here’s how banks leave real estate investors trapped in this way.

1. Higher Interest Rates or Loan Costs

If your credit score is down due to high usage, you’ll end up paying an extra 1-4% either on your interest rate or loan costs. On a $400,000 project, this can add up to an extra $4,000 to $16,000 just for one transaction.

2. More Money Down

Banks may require you to put down 5-10% more on a property if your credit score is low. On a $400,000 transaction, this means you’ll have to bring an extra $40,000 out of your pocket. This unexpected cost could prevent you from doing the deal in the first place.

3. Loan Denial

Banks may decline a real estate investor’s loan if their credit score is even just one point below the bank’s guidelines. If you can’t get a loan, you’ll be locked out from getting a rental property, flip, or other investment opportunities.

Solution to the Banks’ Real Estate Investor Credit Problem

The credit score usage trap is real. It happens to almost 80% of the clients that we see.

The solution to avoiding the credit score usage trap is simple: stop using your personal credit cards for business use. If your credit usage is in your business’s name, then it won’t impact your personal credit score.

Here’s the method we recommend.

How to Move Your Credit Usage from a Personal to a Business Credit Card

If you have an LLC set up, you’re already working as a business, and your usage is impacting your personal credit score, then you can move the debt.

You can pay off the credit card balances using a private loan. This usually looks like having a family member or friend provide the funds.*

Then, you let the credit cycle through 30-90 days to allow your score to go back up. Once your score is settled, you can apply for a business credit card and move the balances over.

*If you don’t have someone you can ask for a private loan to do this, reach out to us. We do this type of loan all the time for our clients. We don’t want credit to be the reason you can’t flourish in your real estate investing career.

Stop the Banks’ Usage Cycle Trap for Real Estate Investors

It’s important to choose the right credit card. Some business cards do still show up on your personal credit. Do not choose this card – it defeats the whole purpose!

Not sure which card to pick? We have a link on our website to a business card that we use ourselves and highly recommend. If you get it, we’ll give you $250 off the next loan you do with us.

Tricks and tools like this are what set apart successful investors. Don’t let credit and banks trap you in pricey loans!

Happy Investing.

Text: "Where to Find HELOCs"

Where To Find HELOCs with the Best Terms

Start using your HELOC today. Here’s where to find HELOCs.

There are three main places you can look to find HELOCs.

Where to Find a HELOC

A HELOC is a lien against a property that is set up much like a credit card.

A financial institution will set it up for you with a:

  • Credit limit – the maximum you can borrow from the HELOC.
  • Term length – the amount of time the HELOC is available and the limit is locked in (usually around 10 years).
  • Methods to access the money how you can borrow the money (bank wire, debit card, etc.).

1. Credit Unions

Firstly, look for a HELOC at a credit union. Credit unions will have the best HELOC rates and terms. We’ve found that to be universal state-to-state.

Shop around at local credit unions. Make sure the lender you’re working with likes real estate investors. Each lender has their own niche. One may prefer doing car loans, but another will prioritize HELOCs.

You’ll find the best deal from a credit union, but you should still shop around for the right one.

2. Local Banks

Secondly, look into a local bank.

Local banks usually like to work with real estate investors. They’ll have more products available as far as HELOCs for rental properties and HELOCs on multiple properties.

3. National lenders

Thirdly, look for a HELOC with national lenders.

Now that the refi-boom is settling down, national lenders and mortgage brokers are starting to offer HELOCs. Going through a national lender will open you up to more products, but the cost is almost guaranteed to be higher.

Consider all three of these options to find the best deal you can. For a HELOC, the “best” deal involves not just rate but LTV.

Read the full article here.

Watch the video here:

https://youtu.be/MoUp2CAht0A

What Is the Best Real Estate Loan For Investing?

10 things to look for to find the best real estate loan for your investing.

You can get confused fast with real estate funding. 

What’s the difference between hard money and private money? Institutional lenders and bank lenders? And what even is OPM?

Most importantly – how do you know which lending option is best for you?

Our goal is to make sure you use the correct leverage for your real estate project:

  • What will fit your project?
  • What will be the most profitable for you?

Realistically, you need a little bit of everything.

Let’s go through the nuances of each leverage type, so you know the best real estate loan for your investments. Here are 10 qualities of real estate leverage to consider.

1. Speed

In real estate investing, most of your deals come down to speed. If you can close faster than another bidder, you can get the property – even if the other person offered more money.

Typically, the fastest lending options will be hard money and real OPM. 

OPM is using real people’s money, from family, friends, or anyone with money to lend. If you build a relationship with the right OPM lenders, this can be your fastest funding option. OPM can be one phone call and bank transfer away.

Although more expensive, hard money lenders can save you money in the long run with the savings you get from closing quickly on wholesale properties. Hard money lenders can potentially get you money within days (sometimes quicker).

Institutional lenders are fairly quick, typically taking two or three weeks, sometimes four.

Banks are usually the slowest at four or more weeks (unless you already have a line of credit set up, like a HELOC).

2. Credit Score

Credit is a major factor in the loan process. Requirements for credit scores have gone up over the last few months as money tightens. 

Institutions and banks have strict credit score requirements. The target for acceptable credit is constantly moving. Currently, you’ll have a tough time finding any loans with a score lower than 680. The best loans are available to people with a 740 and above.

Hard money lenders will check credit to make sure you’re not defaulting. But your actual score doesn’t have much bearing on your ability to get a loan.

OPM lenders aren’t as concerned with your actual credit score. OPM requirements will vary from person to person. But as long as you’re responsible in protecting their money, you can get an OPM loan.

3. Experience

Have you been in business for 2 years? Have you done enough transactions?

The toughest on experience are banks and institutional lenders.

Institutional lenders typically require three to five transactions over a three-year period. They’ll still consider you if you have less experience than that, but they’ll need a higher down payment.

Banks are the strictest. They usually want you to have five completed projects in recent years, plus at least two years of tax history on investment properties.

Hard money and OPM are the easiest on experience.

Hard money lenders care that you have a profitable deal. OPM lenders care that they get a return on their money. Neither lender will be overly concerned with your experience level. They’re more understanding that “you gotta start somewhere.”

4. Income

What lenders are concerned with your debt ratio? 

Banks are the only lenders that are always concerned with your income. 

Institutions look at the money you have in the bank, but not necessarily what you have coming in as income.

Hard money might look at your tax returns, but it won’t make or break your loan.

5. Underwriting

How does each lender look at your whole file? What is their criteria, and is it similar from lender-to-lender?

Institutional lenders have fairly consistent underwriting. They all basically require experience, 10 – 20% down, etc.

The other three types of lenders vary drastically.

Banks will always have some sort of requirements. But it’s different between large banks and small banks. Local banks will always be more interested in lending to investors.

Hard money and OPM both vary, too. You have to get to know the lenders in your area to get a feel for their requirements.

6. Flexibility

What if you need a loan for a rural property? Or what if some other unique situation pops up? Which lenders can be flexible with that.

Institutions and banks are the most fixed in what they offer. Institutional lenders loan only within MSAs. If a property is outside of city limits, they won’t offer any loans. Similarly, banks typically only lend within their footprint. You’ll have to talk to banks near you to learn those service areas.

Of course, hard money and OPM are more flexible with locations, funding plans, and more.

7. Pricing

Every loan has a cost.

Bank loans have a lot of limitations, but this is where they shine. Interest rates and origination fees will almost always be lowest at banks. Interest rates average around 5.5 – 6%, and fees are around 1 – 1.5 points.

OPM is also pretty cheap, and more flexible than banks. Your interest rate will depend on your lender, but there are usually little to no points with real OPM.

Institutional and hard money lenders will be the most expensive, with interest rates around 10 – 12% and fees at 2 – 3 points.

8. Verified Funds

It makes sense that lenders want to know that you’ll have enough money to pay them back. But lenders go about verifying funds differently.

Institutions and banks typically require two months of bank statements. They want to prove you have the money for the down payment, rehab costs, and any carry costs. These lenders emphasize how much money you have and where it came from. They often don’t allow gap funding.

Hard money and OPM lenders, however, are fine with gap funding. These lenders’ requirements vary, but generally, funds are not a major consideration.

9. Funds Available

How much money does the lender have to offer? Do they ever run out of money, or tell you you’ll have to wait a couple weeks before they have funds?

Typically, the places that have “unlimited” money are institutions and banks. Institutions are backed by Wall Street funds, and banks can always borrow from the Fed.

Hard money and OPM are a bit more limited. Hard money fund availability is based on how many investors they have. Real OPM is limited by the bank account of your lender. A downside of hard money and OPM is that money may run dry; there’s no guaranteed constant flow.

10. Multiple States

If you’re an investor who does deals in multiple states, who will be able to consistently help you? If you live in Oklahoma but invest in Texas, which lender can you count on?

Typically, institutions are your best bet for multi-state investments. If you need someone to grow with you state-to-state, this is your main option.

Many hard money lenders are local, and they focus their investments in a single community. Similarly, banks only lend within their region.

OPM’s multi-state lending ability depends on the client, but there is flexibility.

So What Is the Best Real Estate Loan?

All in all, there is no “best” real estate loan. Remember, you need all types of leverage for a flexible, lucrative investment career.

Each loan has its limitations and perks. Here’s a quick overview of each type of real estate loan.

More Info on Real Estate Loans

If you’re left with questions about the best leverage option for you, we’re here to help.

Email us at Mike@HardMoneyMike.com with questions about your deal.

Or join our weekly call here, every Thursday from 1:15 PM – 2:15 PM MST.

Text: 'Primary vs Secondary HELOCs"

Primary vs Secondary HELOCs – A HELOC for Your Rental??

There are two types of HELOCs, primary vs secondary. Here’s what you need to know about them.

You can get a HELOC from two sources: the house you live in, and, potentially, some of your rental properties.

Primary Home – Primary vs Secondary HELOCs

HELOCs are calculated using LTVs and CLTVs (combined loan-to-values).

To calculate this, the bank looks at the loan balance for your first mortgage, plus what the HELOC will add to it. Then they divide that by the value of your home to get to the combined loan-to-value.

Most banks and credit unions will go up to 90% CLTV, but some do 100% on primary homes.

Using a HELOC unlocks all the equity you’ve established on your home as home values go up over the years.

Rental Properties – Primary vs Secondary HELOCs

Rental HELOCs are a little more limited. They have different LTV/CLTV requirements.

For rental properties, there are some banks, credit unions, and mortgage brokers that will allow HELOCs in second position that go up to a CLTV of 65% to 75%.

Different lenders will limit the amount of secondary HELOCs differently, but most will give you one or two properties.

When To Get a HELOC

Start using your HELOC now, before home prices go down.

If you have a lot of equity in your rental properties or home, you can tap into that now while the market’s still high. This limit will be locked in for 10 years, even as your home value will likely come down 5-10% in the next six to nine months.

If you wait to take out either primary or secondary HELOCs you’ll lose more of your available funds.

Read the full article here.

Watch the video here:

https://youtu.be/MoUp2CAht0A

Text: "What is a HELOC?"

What Is a HELOC for Real Estate Investors?

As a real estate investor, it’s important to know: What is a HELOC?

It stands for Home Equity Line of Credit. But what exactly is a HELOC?

It’s a Lien

A HELOC is a lien against a property.

It can come as a first, second, or sometimes even third mortgage. If you don’t owe anything on your house, you can put a HELOC in first position. With an existing mortgage, it’s put in second position.

It’s a Line of Credit

A HELOC is set up kind of like a credit card. The bank sets a limit they’ll lend and a term for how long.

A HELOC can pay for almost anything related to your projects. You can go to Home Depot and get materials, you can pay your contractors, you can make a down payment. It can take the form of a bank wire, a debit card, or whatever other option your bank gives you.

At the end of the month or the end of a project, you pay the HELOC off, and all the credit is freed up. You can use it again, pay it down, then use it again for as long as the term is active.

Typically, the bank will set a 10-year term. So for 10 years, you can use and re-use it up to the limit they set. If your property goes up in value during that time, it’s possible to get a refinance for a higher limit.

It’s a Faster, Easier, Cheaper Source of Money!

Any expenses you can put on a HELOC frees up your investment experience. When you borrow from other places (hard money lenders, banks, etc), there’s more paperwork and more cost.

HELOCs are easier, faster, and cheaper. A successful investor uses every leverage tool at their disposal, so it’s important to tap into this one.

Read the full article here.

Watch the video here:

https://youtu.be/MoUp2CAht0A

Text: "When to Use Hard Money"

5 Times You Should Use Hard Money for Your Real Estate Investments

Here are 5 ways to use hard money right as a real estate investor.

Real estate investing is all about making profit.

And sometimes, to make profit, you need to use hard money loans.

When is hard money your best option in real estate investing? Let’s look at 5 situations where you should use hard money to fuel your investments.

1. Using Hard Money for Speed

The number one way hard money makes you money in real estate investing is how fast they are.

Look at a real example from one of our clients.

He was able to buy a property in Colorado at a $30,000 discount.

Five other people were bidding as high as $330,000 on the property.

But our client was able to close in less than a week, so the sellers accepted his bid of $300,000.

How Much Does a Hard Money Loan Cost?

People can get tripped up with the cost of hard money. Wouldn’t the price of the loan leave our client at a loss here? Let’s compare his hard money loan on this deal to his competitors with a bank loan.

For hard money, he spent $7,500 on origination. A bank loan would have cost $4,500.

Six months’ worth of interest on the hard money loan adds up to $15,000. The same time on a bank loan would accrue $9,900 of interest.

Appraisal underwriting, and processing fees were lower with hard money at $984 (vs $1500 with the bank.)

Overall, our client did pay a lot more for the loan itself using hard money. His hard money loan cost $23,484, and a bank loan would have cost $15,525. That’s an extra cost of $7,959 to use hard money.

Can You Save Money by Using Hard Money for Real Estate?

Despite seeming more expensive, hard money still gave this investor a discount. Why? Hard money enabled him to close fast, so he got a better deal on purchase price.

What was the total cost of hard money? The discounted price of the property ($300,000) plus the hard money loan costs equals $323,484. 

What about the bank loan? The home price of $330,000 plus bank loan costs totals $345,525.

This is a savings of $22,041. Just for closing fast with hard money rather than using the cheaper but slower bank loan.

Using hard money for speed works even when the discount is smaller.

Let’s say our client had bid only 10,000 less than the other investors. He still would’ve saved $1,191 up front on the deal.

Hard Money Savings without a Purchase Price Discount

The option of buying real estate with bank loans is often cheaper. However, in many investment situations, using a bank loan is not a viable option.

If you have to wait 4 weeks to clear your bank loan, but only 4 days for a hard money loan… that becomes the difference between closing on the property or not.

Ultimately, even if using hard money doesn’t get you the lowest price, you still save money in the long run. If the speed of a hard money loan gets you a property, you will still come out on top.

Buying then selling a profitable fix-and-flip will always make more money than never buying and never selling.

2. Use Hard Money if You Have Low Credit

Institutional lenders, private equity, and banks have credit score minimums. If you don’t have a high enough score, you don’t get a loan.

Hard money lenders, on the other hand, are typically not credit-score-driven. Yes, they’ll probably look at your credit, but they won’t base your loan on it.

Real estate investors can have low credit scores for many reasons:

  • Usage – You put your flip rehab costs on credit cards
  • Thin Credit – You have few lines of credit, or young lines of credit
  • One-time Event – You had good credit, then life happened and your score temporarily dipped.

Hard money lenders understand that these issues are not always a reflection of your ability to pay back loans. 

That’s why hard money lenders don’t worry about your credit score, just your credit.

Do you have a history of late payments? Are you defaulting? That will negatively affect you with a hard money lender. 

If you are responsible with credit, but have a score banks won’t accept, a hard money lender will be a good option.

3. Using Hard Money Because It’s Flexible

Sometimes you need an outside-of-the-box lender.

  • Unique Properties – If you have a house or area that’s unique (maybe a dome house, an old manufacturer, etc.), hard money lenders will give you more options.
  • Rural Areas – Most local banks and large hard money lenders don’t lend outside of MSAs. Traditional lenders might not cover thirty miles outside of an urban area, but many small hard money lenders will.
  • Cross Liens – Hard money lenders have more flexibility putting a cross lien on another property. This is useful if you don’t have a lot of money to put down, but do have another property with a lot of equity.
  • Gap funding – Sometimes a mortgage doesn’t quite cover all the costs of your project. Hard money can fill in those gaps.
  • Lot splits – Splitting off a lot can be a headache with a traditional lender. A hard money lender is more flexible with the time it takes to get a survey and everything else prepared. This allows you to split off a lot, sell the house, and keep the lot.

4. Using Hard Money for BRRRRs

Hard money is crucial for successful BRRRRs.

With BRRRR (rental flips), you:

  • Buy undermarket valued properties
  • With a hard money loan
  • Then rate-and-term refinance into a longer-term loan.

If you want to get into BRRRR transactions (rental properties), you have to find a hard money lender or private lender who will loan you 75-80% of the after-repair value of the property you want to buy.

If you get a hard money loan to fund the purchase price and rehab up to 75-80% ARV, you can maximize your refinance. This saves you money, time, and interest.

5. Other Times to Use Hard Money

There are many other reasons real estate investors use hard money. Here are a few:

  • Banks limit you to 2-3 loans. If you’ve maxed out those lenders, hard money can help.
  • Hard money can work as a bridge loan. It covers the down payment of your next property until your other bank-funded property sells.
  • You can keep a project off your credit. Hard money typically doesn’t show up on your credit report.
  • Investment beginners might need help with their first couple projects started before banks will lend to them.
  • Complete a started project. If you end up with a property mid-flip, many banks won’t lend for it. But a hard money lender can easily provide a gap loan to finish the rehab.
  • Hard money has the flexibility to let you come in with other funding sources. (If you want to put repair costs on a credit card, want to use an OPM lender, etc.).

How to Use Hard Money for Real Estate

Want to learn more about real estate funding? Wondering if a hard money loan might be right for your investment? 

Email us your questions anytime at Mike@HardMoneyMike.com

Or join our weekly Leverage Up call here, every Thursday from 1:15 PM to 2:15 PM (MST).

Text: "Benefits of a HELOC"

Benefits of a HELOC: Are You Missing Out?

If you don’t use a HELOC in your real estate investment career, you’re missing out on these benefits.

The uses and benefits of a HELOC for a real estate investor are broad and huge. This line of credit is one of the best ways to tap into your existing money to create more money.

Let’s take a look at a few of the ways you can utilize your HELOC to benefit your real estate investments.

Benefits of a HELOC for Real Estate Investors

Down Payment

You can use a HELOC as a down payment on any loan – hard money or long-term. Anytime a lender requires a down payment, you can take the money off your home equity line of credit, and bring it to closing.

For down payments on rental properties, your lender will still require the money borrowed from your HELOC to be included in your debt ratio.

Construction Costs

For a flip or a BRRRR, you can use money from your HELOC to cover the costs of construction.

Money from a hard money lender or bank comes at a higher price. If you’d prefer to use your HELOC to cover construction costs, you can lower the amount borrowed from a lender.

A HELOC will be some of the cheapest money you can find out there – especially now with money tightening. Using it helps lower your overall costs.

Another benefit of a HELOC is the speed and flexibility. If you don’t have time to wait for your lender’s escrow process to pay your contractor, you can just pull the payment off your HELOC.

Carry Cost Benefits of a HELOC

Carry costs include monthly interest, HOA fees, mortgage payments, some materials and construction, and any other regular cost associated with owning the property.

These costs can turn into a burdensome expense on a flip. You can pull from your line of credit to cover carry costs, and when your flip sells, you can put it all back in.

Buying Properties at Auction

There will be more foreclosures coming up soon. To take advantage of this turn in the market, you can use money from your HELOC to buy a foreclosed property at auction.

The benefit of a HELOC here is that you don’t have to get lender approval or meet lender requirements before placing a bid on a property. You can pull from it, pay for the property (or at least the down payment), and refinance later if needed.

Buying Wholesale Properties

You can also buy properties from wholesalers or the regular marketplace when you otherwise couldn’t. You close with a HELOC, then go back and refinance with a hard money or bank loan.

With this strategy, you can close on a deal faster than anyone else. You don’t have to sift through the paperwork and red tape of a loan; just go to the bank and wire out the funds.

Bridge Loan Benefits of a HELOC

Some investors use their HELOC to bridge between properties.

They have one flip for sale, but they’re ready to buy their next one. They use a HELOC to cover the down payment, then pay it back when the other property sells.

You can create your own bridge loan by using a HELOC.

Lend to Other People

You can also use it to lend to other people in the real estate investment community at a profit.

You can borrow from a HELOC at a rate of 5-6%, and you could charge someone else up to 10-12%. (But of course, always be careful and protect yourself when lending to other people).

Overview of the Benefits of a HELOC

  • Using your HELOC allows you to use your money, without taking anything from your savings or 401k
  • You can tap into the equity that’s already at your disposal
  • It keeps projects going while typical loans are tightening up
  • You can get into properties quickly and refinance a few weeks later
  • You can avoid the higher rates of external lenders by borrowing from your HELOC

Read the full article here.

Watch the video here:

https://youtu.be/MoUp2CAht0A