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7 Ways to Get the Best Rate on a Hard Money Loan In This Market

December 9, 2022/in Blog

Interest rates can make or break your REI project. Here’s how to get the best rate on a hard money loan.

Investing is a leverage game.

You need other people’s money to make money – but that doesn’t mean you have to overpay for that money.

Let’s take a look at how to get the best rate on hard money loans in the current environment.

What Is Hard Money?

Hard money is sometimes called asset-based lending, or private money.

Hard money is a form of leverage focused on the property. All lenders have criteria they require from borrowers. For hard money lenders, the main lending requirement is about the property and project itself.

Lender Niches Will Affect Your Rates

Investors have their own niches, their own likes and wants for their investment experience. Maybe someone doesn’t want rural properties, someone else focuses only on high-end houses, another on low price points.

Lenders have individual likes and dislikes the same way. Every lender draws a box of what they like to lend for. The more your property fits in their box, the better rate they’ll give you.

This means that not all lenders will want your particular project – or that they won’t give you the best rate on your hard money loan. It’s not personal. Not every project will fit in every lender’s “box.”

If you want the best rate, then you’ll have to find the lender that likes your project, your experience, and your property.

Types of Private Money

There are three types of lenders that make up the private lending world: local, national, and OPM.

Local Lenders: Lend regionally, in your state or city only.

National Lenders: Backed by Wall Street hedge funds. They lend all throughout the US.

Real OPM: Other People’s Money. A private loan from someone you know..

The best rate on a hard money loan will vary lender to lender, depending on the type of institution and their preferences. One lender might do land loans, but another won’t. One may offer great rates on new builds but not even offer scrapes.

Whatever your project, it’s important to find a lender that matches you. The closer you match a lender’s preferences, the better your rate.

Despite all these differences between lenders, there are some general rules between the three types of hard money.

Real OPM

The best possible rates come from OPM. A friend, family member, or other investor who wants a safe place to put their money will cost you a lot less than a formal lending institution.

You save on cost with an OPM loan because there are no points, fees, or appraisals. Every institution will charge you these extra on your loan.

OPM also saves you the most on interest rate. The interest rate criteria for most OPM lenders is, “more than they could get in an IRA.” Typically with OPM, interest rates are 3-4% less than other lenders.

National and Local Hard Money Lenders

Both local and national lenders will have similar pricing, for the most part.

Rates for these lenders depend on what they’re looking for in their portfolio. Now, in late 2022 to 2023, most lenders’ rates will be between 9-12%.

One difference, however, is that local lenders tend to not have extra underwriting and appraisal fees.

Shopping Around to Get the Best Rate on a Hard Money Loan

The best rates aren’t going to come to you. You’ll have to shop around to find the best lender for each of your projects.

Talk with lenders in your area and get estimates for loan costs. Then, you can use our free Loan Optimizer tool to quickly compare lenders and find out who’s cheapest.

Lowering Risk to Get the Best Rate on a Hard Money Loan

To get the best rate on a hard money loan, think of it from the lender’s perspective. They want to lend to people who are low risk. Therefore, the less risk you pose, the better your rates become.

So how do you lower the risk? Here are 7 ways you can lower your risk to get a better rate from a lender.

1. Straight Talk

Firstly, be able to back up everything you tell your lender. No lender wants to be in a position where they have to try and figure out what’s true and what’s not.

If you do this, lenders will put you at the end of their long line of waiting borrowers – or they’ll increase your cost.

Give them all the information they need. Be honest about everything – even the ugly parts of your credit or investment history. If you think your rate will be worse if they knew the full store, just remember… It’ll be even worse if they find out you hid it.

2. LTV

The lower the loan amount on a property, the less risk for the lender. The less risk for the lender, the more likely they’re going to give you a better rate.

Putting more money down results in a lower rate overall.

3. Experience

If you can show a lender that you’ve had success flipping houses, building homes, or developing land, you pose less risk. Investors with projects under their belt usually see lower interest rates.

4. Credit

National lenders (hedge funds) use credit as one of their main criteria for rates. The better your credit, the better the interest rate they can offer you.

The difference between a 640 score and a 740 could be a difference of 1-1.5% on your interest rate.

Local lenders and OPM lenders don’t consider your credit score as a major requirement. They will look at your credit, but only to make sure you’re not defaulting or have a foreclosure or bankruptcy.

5. Property & Project Types

As mentioned before, each lender has a real estate niche. If your project fits in their box, you can catch a bit of a break on the interest rate. If it does not fit in their box, they may still lend to you, but they can charge you a little more, making your project less profitable.

6. Loan Size

Some lenders won’t lend under a certain amount.

Hedge funds often dislike smaller loans. Some won’t lend under $100,000 – some have a threshold at $500,000.

Smaller loans, like $25k or $50k, are more suitable for OPM. OPM lenders often have smaller available reserves to lend.

7. Location

Local lenders tend to have a specific region of service. National lenders tend to only loan in metropolitan areas. And OPM lenders tend to be more flexible.

But again, each individual lender will have their own preferences. To get the best rate on a hard money loan, find out the lender whose box you best fit in.

The Truth About How to Get the Best Rate on a Hard Money Loan

If you want the best interest rate on a private loan, you really need to shop around.

There’s money in the money, and the less you have to pay for leverage, the more successful your real estate investing career becomes. Hard money is a powerful investing tool, but the wrong interest rate can destroy your project.

You can download our Loan Optimizer here. Send us an email at Info@HardMoneyMike.com if you have any other questions about how to find the right hard money loan. And check out our YouTube channel for more free real estate investing information.

Happy Investing.

5 Ways to Flip Properties During a Recession

November 11, 2022/in Fix-and-Flips

Real estate investing can still be your career. Here are 5 tips to flip properties during a recession.

With prices going down, can you really make money on flips during a recession?

Some investors dabble in fix-and-flips while times are good in real estate. But there are other people who use real estate investing as their career, and they’re going to flip no matter what. How can those investors continue to be successful as money tightens up?

This is the third recession we’ve been through at Hard Money Mike. Here are 5 strategies we know work for flips during hard times.

1. Buy on the Lower End

What’s the medium price point in your community right now? Stick to that number and below.

Interest rates will force any current buyers into a much lower budget. Payments on cheaper properties will still be close to (or cheaper than) rent, even if rates go up to 8 percent.

Affordability puts more buyers at a lower price point as a recession goes on. So you’ll make more money in the long run with lower priced homes.

2. Only Buy Properties That Cash Flow

We don’t know what’s going to happen in the market. But we do know two patterns from past recessions:

Homeownership will go down.
Rent prices will go up.

If you’re flipping, you need to know the worst case scenario. Worst case for you is the house won’t sell, and you’ll need to convert it to a rental. You may have to keep this property for 6, 12, or 18 months before it will sell.

In the event you can’t sell when you need to, it’s important to make sure the property cash flows. Or at the very least, that you have the ability to refinance.

Another tip to keep in mind: if you may have to refinance and rent your property… don’t drop the price!

The appraiser values your home based on your last marking listing price. Every time you drop a property’s price, it drops loan availability and LTVs.

3. Start Cutting Your ARVs By 10-20%

This one’s hard for a lot of people who do flips. But to flip properties during a recession, this is a necessary step.

Interest rates are anticipated to rise from 7% this year to 8% next year. When interest rates rise 1 percent, consumers’ purchase power goes down 7-10 percent.

Say you had someone who could qualify for a $200,000 loan at a 7% interest rate. Then the rates go up to 8%. That same person would only be able to qualify for around $180,000.

You have to understand: as interest rates go up, prices go down and payments go up. And people buy based on payment.

To set yourself up for profit, take into account the upcoming increase in interest rates, and cut your ARV.

4. Look at a LOT of Deals, Buy Very Few

Most people who aren’t full-time fix-and-flip professionals have gotten out of the business. They won’t be back for at least another year or two.

Because of that, sellers will have more deals. Wholesalers have more available right now. There are also more real estate agents specializing in REI, so they’ll have deals, too.

With more deals available, it’s a great time to buy.

However, there will also be fewer buyers. So while it’s a good time to buy, be careful not to get stuck with a bad property and no buyers.

Look for properties that meet these criteria:

In good areas
At a lower price point
Cash flow

Put in a lot of time to research properties. Jump on the best ones, and let the others go.

5. Quality matters

If you flip properties during a recession, focus on quality.

We had a client recently who learned this lesson. They were looking for a buyer that could have afforded a $800,000 house in January of 2022. Then interest rates skyrocketed. Come October of the same year, that same buyer could only afford $575,000.

Imagine the expectations of someone who was recently going to buy an $800,000 house and now can only afford $575k. They need to walk in and see a glimpse of the $800k quality.

At the very least, these potential buyers can’t walk in and think, “We’d have to start over.” If they feel they need to “start over,” they’re going to leave and find a better house.

Remember, there will be a lot of homes on the market – buyers have more options than just you. You can’t skip renovations and expect to sell fast or get the best price. Make sure you do quality work when you buy flip properties during a recession.

Getting a Loan to Flip Properties During a Recession

If you find a deal you want reviewed, send it our way! We’re still lending, and we’d be happy to help you fund a deal.

Email us at Mike@HardMoneyMike.com with deal information or questions.

Happy Investing.

The Ultimate Guide To Credit During a Recession

September 12, 2022/in Blog, Credit

Take a peek behind the curtain at what your loan officers know about credit during a recession.

One thing’s for certain with the oncoming recession in 2022: your credit score will change everything for your real estate investment career.

Lenders are changing all loan rates and requirements. Loan amounts are down. Interest rates are up.

In inflationary times, central banks tighten money by raising federal interest rates in an attempt to reduce inflation. Lenders and brokers get a new set of rules they have to abide by during a recession.

Let’s look at some examples of the “new rules” loan officers and underwriters are looking at. We’ll see what credit score you need, and how your credit will impact the type of loan you can get.

Credit’s Impact on Loans for Real Estate Investing During a Recession: The Charts

Loan officers look at a scale while pricing out a loan. They get this chart from the underwriters, and this becomes the basis for the loan.

These scales show the LTVs and interest rates an investor could get based on their credit score.

National Hard Money Lender Credit Chart During a Recession

Here’s an example of a scale for a national hard money lender:

A minimum acceptable credit score used to be 620. Now it’s 680. So now, from this hard money lender, anyone with a credit score from 620 to 679 no longer has an option.

LTVs have also taken a dive. Most lenders used to loan up to 90% of the cost of the property or ARV. Now, you’d be lucky to get 80%.

Rates are now sitting around 10%+. When LTVs were at 90%, the rates were in the mid-7s. This means rates have gone up almost 3% – just over the last 6 months.

There’s less money available in general. To get a piece of what little there is, you’ll need to maintain a higher credit score than before. Your credit has a deep impact on your loan options.

Traditional Bank Lenders Recession Credit Scale Example

Now let’s take a look at the traditional side, with longer-term loans:

This chart uses basis points. It equals to about .25%-.5% higher rate for the lower credit ranges/higher LTVs.

You can see that this traditional lender has also eliminated all options for anyone under a 680 credit score. In the recent past, a score of 640 to 679 could get you something, you’d just have to pay more. Now, you don’t even have options in that range.

Credit score matters if you want the best rate – or any leverage at all!

DSCR Loan Credit Requirements in a Recession

Lastly, let’s take a look at an example from a DSCR lender:

Again, over the last 2-3 months, this lender has eliminated anything below a 680 score for a DSCR loan.

For this DSCR, between a 680 and a 760, there’s a 1.125 point higher difference in rate for origination.

To get cheaper money during a recession takes a great credit score. To get any money at all takes a good one.

How Does Your Credit Impact Your Cash Flow and Deal Flow?

We’ve gone over a behind-the-scenes look at the grid of requirements from underwriters and lenders…

But how does it all affect you in practice? How does it impact your money coming in and money going out?

Lower Score, Higher Down Payments, Higher Interest

For credit scores below 680, if you can even get a loan, you can expect to put in 5-15%+ more than usual.

Hard money loans that used to require 10% down at 680, now need up to 25%. So on a $200,000 deal, you’d now have to come up with $50,000.

More money into each deal means fewer deals (deal flow) and more money out-of-pocket (cash flow). To combat this, you may need to look into something like gap funding.

Additionally, you’ll be paying more in interest on your BRRRR rentals and flips. When a fix-and-flip has higher interest, your margins come down. When a BRRRR has higher interest, your cash flow comes down.

Focus on your credit. Your credit score has a direct relationship with your profits. A low score means more money is going out and less is coming in on your investments. A high score means less money is going out and more is coming in.

Example of Credit Score’s Impact on Rates and Cash Flow in a Recession

Let’s look at an example with real numbers to get a picture of just how seriously your credit score impacts cash flow on your real estate investments.

Comparing Interest Rates

Pretend you have a $300,000 loan. And say you were able to get a 6% interest rate – a normal rate for today. Your monthly payment is around $1,800.

Now, for every 10 to 20 points your credit score lowers, your rate increases. This increases your monthly payments by $100 to $200.

So with a low score, you’d only be able to get a 9% rate on that $300,000 loan. You’d be giving $615 every month straight to the bank. That’s money other investors will be able to use to re-invest.

Interest Rates Over the Life of the Loan

This interest story gets worse when we consider the full life of the loan.

The person with a 6.5% interest rate pays a little under $1,200 per year in interest, or around $35,000 for the full 30-year loan.

The person with 9% pays over $7,300 yearly, and over $221,000 over the course of the loan!

We can take this example out further.

Let’s say we have a portfolio of 10 properties, not just one. Ten properties, each with $300,000 loans.

At 6.5%, you’ll spend almost $350,000 over 30 years between the interest of all the loans. At 9%, you shell out over $2.2 million in interest in 30 years.

Cash Flow Conclusion

A low credit score is a major disadvantage. Properties that would cash flow for someone else, won’t for you. Your debt-to-income could disqualify you for DSCR loans. Your score itself can disqualify you for many other loans.

Look at the impact of your credit score. Keep more money to do what you love and give less to the banks in the form of interest.

If you need to work with a credit specialist to get everything in line, it’ll be worth your time. Do it ASAP – now is the time to get prepared as a real estate investor. Because in 2023, prices will come down, and you don’t want to miss those opportunities.

Loan Options for Real Estate Investors with Bad Credit in a Recession

If you have bad credit, what are your options during a recession?

Understand Your Limitations

The products available to you with a bad score are 10% of what’s available to someone with a 700+ score. Understand the following limitations:

You’ll have to shop around more
You’ll pay more in down payments with LTVs 10-15% lower than other investors
You’ll pay 1-3% higher interest rates.
The question is no longer, “Do I want to do this deal?” but “Can I do a deal?”

Look at Unique Financing Opportunities

You may be able to look at unique ways to finance properties.

Subject tos or owner carries don’t look at your credit score. These deals don’t directly involve a lender or have an underwriting process – an owner just needs you to come in and take over payments.

A unique opportunity like this can keep the ball rolling for your investment career while you raise your credit score.

No Substitute for a Good Score

As you saw before, some people would have to pay $2 million+ dollars extra on their portfolio, just because they didn’t take care of their credit.

You can look into other options, like subject tos, owner carries, and OPM, but first and foremost, focus on getting your credit score in the 700s.

How to Improve Your Score Quickly

There are a couple quick ways to improve your credit, depending on why your score is low.

If high balances are your problem:

Many real estate flippers use their credit cards a lot, so they over-leverage everything. High balances impact 30% of your credit score.

Try using private money to fix this problem. If you can borrow money from family or friends, use it to pay off your cards. Even just for 60 days, it can bump your score up because your usage and balance will go down.

While your balances are temporarily lowered with private money, you can apply for your loans. Let your lenders know you have that debt, but it won’t impact your credit score for the time being.

If length of credit is your problem:

Get authorized by a family or friend with good credit who will authorize you. You get to use their credit history on yours, which quickly bumps your credit.

Also, if you have a lot of credit cards and want to close one – don’t! Pay it off, then let it sit on your account unused. That history will keep accruing on your credit report, and it increases your available credit balance while lowering your usage.

If your problem comes down to bad habits:

To be a real estate investor, you have to build good financial habits to build a solid foundation for your credit score. No way around it.

If you’ve never been educated on credit:

More Tips to Raise Your Credit During a Recession

Download our free credit score checklist to start getting on top of your credit.

If you want more information about your credit score, you can watch these credit videos, or find other credit blogs on our website.

And if you have any lingering questions about credit and how it could impact your real estate leverage, reach out to us at HardMoneyMike.com.

Happy Investing.