Tag Archive for: Real estate investing

How To Guarantee Profits in Real Estate Investing

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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.

How to Calculate Your Hard Money Loan Amount

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What does your lender take into consideration to calculate your hard money loan? Here’s what you need to know.

How much could you get in a hard money loan?

At least 50% of your success as a real estate investor will come from using and understanding leverage well. Simply knowing your numbers gets you ahead of the curve.

You need to be able to figure out a ballpark number of what a lender will give you for your property. Let’s go over how to calculate your hard money loan, what costs you’ll need to know about, and run through some examples.

Calculate a Hard Money Loan: Maximum LTV

There are two main calculations for a hard money loan.

The first is: What is the maximum loan value a lender will offer?

Every hard money lender has a maximum loan ability. This maximum is based on the property’s after-repair value or ARV.

ARV is what the property will be worth at the appraisal when you sell or refinance. This is the number the property could go for on the open market after you’ve done all your renovations.

LTV vs ARV

Traditional lenders use “loan-to-value,” which means they base their loans on the cost of the property. 

But hard money is designed for real estate investing, so they lend with the assumption that your property is value-add. It’s a property that needs work, and when you put in the work, the home will be worth more in the future.

The after-repair value is what hard money lenders base their loan on. Most lenders will lend somewhere between 70-75% of the ARV. However, the actual loan-to-ARV percentage you get depends on factors like experience, credit, etc.

Most hard money lenders will only approve a loan for an amount you can actually afford. These lenders want two things:

  1. To get their money back.
  2. For you to make money.

75% ARV is the average amount they can lend safely. This amount estimates that you’ll be able to both pay all your costs and still make a little profit for yourself.

Max LTV for Hard Money Example

Let’s look at an example. We’ll keep it as simple as possible and say our ARV is $100,000. This loan amount is likely unrealistic depending on your market, but this calculation works the same with any number.

If $100,000 is our ARV, that means it’s the absolute maximum any hard money lender could loan you. In rare situations, a hard money lender may loan you up to 100% of your ARV.

More common, however, is that you get 75% of your ARV. To figure out this number, you just multiply your ARV by .75:

ARV  ×  % of ARV  =  Loan Amount

$100,000  ×  .75  =  $75,000

$75,000 is the realistic maximum loan you can expect from a hard money lender for a property with an ARV of $100k.

Calculating the loan-to-ARV for a hard money loan is only the first calculation, though…

Calculate a Hard Money Loan: Maximum Actual Loan 

If the first question is what is the maximum loan amount you can get, then the second question is: What’s the actual amount they’ll lend?

You might hear a hard money lender say they’ll lend up to “80/100” or “90/100” – let’s go over what that means.

How to Figure Out Actual Loan

You’ll notice there are two numbers with a slash in between.

The first number is the loan-to-cost (not ARV). For example, if it’s 90/100, that means they’ll lend up to 90% of what you bought the property for. 

The second number is the rehab cost. In the 90/100 example, the lender would give you 100% of the costs needed to fix up the property.

So in this case, they’ll offer you a loan that covers up to 90% of the purchase price and 100% of the rehab costs.

But remember: there’s still the overall maximum loan of $75,000 that we can’t go over.

Calculate Your Costs for a Hard Money Loan

So say a lender tells you they can loan 90/100 and 75% of the ARV, and your ARV is $100,000. That means they’ll give you 90% of the purchase cost + all the construction costs, but that total number can’t be more than $75,000.

Let’s break this down with some simple examples.

Don’t Forget Closing Costs

We’ll say we’re buying a property for $60,000, and it will take $20,000 to fix up.

There’s one more number many real estate investors fail to include here: closing costs. This number includes:

  • What you pay the title company, escrow attorney, or whoever performs the closing.
  • Lender origination fees.
  • Title costs.
  • Insurance.
  • Anything else that goes into the closing of a transaction.

Your closing costs will be dependent on your purchase price. For our $60k property, closing costs will be somewhere between $1,800 and $3,000. We’ll go with $3,000 for our example.

90/100 Hard Money Loan Example

Here are the numbers broken down for our current example. How do they work out for a 90/100 loan?

Purchase Price:  $60k

Rehab Costs:  $20k

Closing Costs:  $3k

Total:  $83k

Now, if the lender offers 90% of the purchase price, they’d cover $54,000 on this property. That leaves $6,000 (aka, 10%) you’ll have to cover.

They’ll also pay for 100% of the $20,000 construction costs. So as long as you stay in-budget, there will be no out-of-pocket costs there.

A hard money loan covers no closing costs. You’ll need to fund all $3,000 there.

Here’s what we’re left with:

Loan Covers:  $74,000

You Cover:  $9,000

Now you know going in that you’d need $9,000 to make this deal work. 

You can also see that the $74,000 is less than the max LTV of 75% (or $75,000 on this case). But what if our rehab costs were actual going to be $25,000 instead of $20k?

This would push our loan coverage up to $79k. The loan would still only cover $75k, so you’d be stuck with an extra $4,000, totaling your out-of-pocket cost for this property to $13,000.

80/90 Example

To really drive this home, let’s go through the exact same example but with an 80/90 loan.

If the purchase price is still $60k, they’ll give you 80%, so:

$60,000  ×  .80  =  $48,000

Rehab costs are still at $20k, so now the loan would cover:

$20,000  ×  .90  =  $18,000

The total loan amount would be:

$48k  +  $18k  =  $66,000

Your total costs would be:

Purchase:  $12,000

Rehab:  $2,000

Closing:  $3,000

Total: $17,000

For a 80/90 loan, you’ll need to bring in $8,000 more than you would a 90/100 loan.

Other Factors in Calculating a Hard Money Loan

This is a very basic way to calculate your hard money loan. Keep in mind these numbers will shift a bit depending on your qualifications, experience, and credit score.

But even a ballpark number keeps you prepared. And the better prepared you are money-wise, the better terms you can get.

Additional Costs on Your Property

The costs of real estate investing can add up. This is why it’s important to know before closing on a loan – or even before approaching a lender – what you can truly afford.

One more cost that’s easy to lose sight of in the midst of leverage is the carry costs once you actually own the property.

You’ll be paying interest and principal every month, plus the accumulation of taxes, insurance, and potentially HOA costs. These are all amounts that will be coming either out of your pocket or from gap funding sources. 

More Info on Calculating Hard Money Loans

We hope this helps you as you navigate your real estate investment career. Our purpose is to make sure you use hard money correctly, knowledgably, and in the right positions.

Be sure to check out our YouTube channel for more real estate investing breakdowns.

If you have any questions, or a deal you’d like us to run the numbers on, we’d be happy to help. Email us at Info@HardMoneyMike.com.

Happy Investing.

How to Refinance a Rental Property Into a DSCR Loan

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100% leverage for BRRRRs will be back on the table soon. Here’s how to refinance a rental property into a DSCR loan.

“Can I use a DSCR loan for a BRRRR?”

Yes!

A DSCR loan is one of the many products you can use to refinance your BRRRR rental property. 

Using the BRRRR method, you could buy a house with a hard money loan, fix it up, then refinance with the DSCR.

Let’s go through an example of what it would look like to refinance a rental property into a DSCR loan.

What Is a BRRRR and a DSCR Loan?

To get started, let’s review what these two real estate investment terms are.

What Is a DSCR Loan?

A DSCR loan (which stands for debt coverage service ratio) is a long-term rental loan with minimal qualification requirements. Your ability to get a DSCR loan is based on the property’s debt ratio, not your income, history, or experience. As long as the rent from the property covers all its expenses (mortgage, taxes, insurance, and HOA fees), you can qualify for a DSCR loan.

DSCR loans rely on cash flow. There are some DSCR products out there designed for negative cash flow properties. But these loans have higher interest rates, lower loan-to-values, and more cash out-of-pocket.

What Is a BRRRR?

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. It’s a time-tested real estate strategy for acquiring cash-flowing rental properties.

In BRRRR, there are two loans involved:

  • The buy loan. The loan you use to close the house, do the rehab, and handle carry costs until you get a tenant. Real estate investors often use hard money for this, since it’s a short-term loan.
  • The refinance loan. The loan that gets you out of the hard money and captures the equity you put in the house with your repairs.

A DSCR loan can be a perfect fit for many BRRRRs’ second, long-term, refinance loan.

Appraised Value vs Purchase Price for a BRRRR’s DSCR Refinance

DSCR loans come in many different products (interest-only, 30-year fixed, etc.). You can use any type of DSCR loan as a refinance for a BRRRR.

There is just one question you need to ask your lender: For the LTV on a DSCR refi, do you need to use the appraised value or the purchase price?

When you do a rate-and-term refinance with a conventional loan, the guidelines often allow you to use the appraised value. For DSCR loans, however, lenders write their own guidelines. The number used for the LTV varies from lender-to-lender, so it’s always important to ask.

A Fast Refi

You don’t want to be stuck in the hard money loan for very long at all. The ideal BRRRR reaches the refinance stage within 90 days. The interest rate on hard money adds up quickly. It’s important to figure out all the details of your refinance ahead of time so you can get through the process fast.

We’ve been doing BRRRR long before it was named that. Back in the day, we called it “Quick to Buy, Quick to Refi.” The old name emphasizes a part of the process that many current BRRRR investors miss.

To be quick to refi:

  • Make sure you’re pre-qualified for the refinance loan, before you even close on the property.
  • Understand when you can use the appraised value of the house. This will tell you how much money you’d have to bring into the refinance.
  • Plan out whether you can get this BRRRR done with 100% leverage. 

Refinance a Rental Property into a DSCR Loan with 100% Leverage

100% leverage means you don’t put any of your own money in – not for purchase, closing, rehab, or even carry costs. In 2010, we helped many clients do BRRRRs with zero money out-of-pocket. Those opportunities will be available again soon.

For a successful 100% leverage BRRRR, the property you buy has to be at least 25% undermarket. In a down market (like the one quickly approaching us now), you can find many properties for 25-40% below market value.

Example of a 100% Leverage BRRRR

What numbers do you need in order to figure out a zero down option for BRRRR? Let’s go over a couple examples.

The 75% Rule

As we’ve covered, the short-term hard money loan comes first, and the long-term refinance loan comes second. But you have to know what LTV you’re qualified for before you close on the loan.

For most cases with a rate-and-term refinance, you can qualify for an LTV of 75% of the current appraised value.

To get 100% leverage for your BRRRR, all of your costs have to stay under 75% of the after-repair value.. For example, if you had a property with a projected ARV of $400,000, a 75% LTV would leave you with a $300,000 loan (aka, 75% of $400k).

Now, the difference between the ARV and the LTV is the amount you get to budget for all your costs (purchase, closing, carry, and construction). In this case, that would be $100,000. Any costs above $100,000 end up coming out of your pocket.

Budget for Costs

Let’s continue with our previous example.

Let’s say the purchase price for this home was $250,000.

We’ve looked over the property, and we could do the full rehab for $35,000. Also, closing and carry costs will be at $15,000.

So, what does all this mean? If you can get a hard money loan for $300,000, then your whole project is covered. You can refinance the whole amount into a long-term DSCR loan and pay off the hard money, with nothing out-of-pocket for you.

Going Over-Budget

No money down is the ideal for BRRRR. There will be more opportunities upcoming for zero down properties.

But for the sake of example, let’s say your costs on a property can’t stay under 75% of the ARV. If the purchase and carry costs are the same, but the rehab will actually cost $65,000, that brings our all-in costs up to $330,000.

Yet even the best hard money lenders probably won’t be able to give you more than $300,000 for this property. That extra $30k comes out of your pocket.

This is why you need to know your BRRRR numbers ahead of time before buying a property. Too many people jump into a hard money loan, but can’t qualify for the amount they’ll need.

Help with Refinancing a BRRRR Into a DSCR Loan

Are you in a position to qualify for a 75% loan? Do you know what numbers your deal needs in order to get a good refinance? Have you found a property that could be a 100% leverage BRRRR?

If you need help answering these questions, send us an email at Info@HardMoneyMike.com. Let’s run the numbers on a hard money loan. We’d love to see you refinance your BRRRR into a DSCR loan.

Happy Investing.

5 Ways to Flip Properties During a Recession

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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: 

  1. Homeownership will go down.
  2. 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.

How to Price a Property When Interest Rates Rise

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Interest rates are changing, and buying power is changing with it. Here’s how to price a property.

“We started looking at this property back in early 2022 when the sale price could have been $800,000… But now what do we do?”

A wholesaler who has a property with us called with this question.

This client isn’t the only one stuck in this situation. If you bought a house earlier this year with a certain price in mind… What should you do now that it won’t sell at that price anymore?

Let’s look at how to price a property when buying power changes.

Interest Rates Change Buying Power

Our client purchased a property in early 2022 with the intent to sell it for $800,000. Unfortunately, 8 months later, that price is very unrealistic for the property.

Right now, they have the property listed at $650k. They’re doing showings but are frustrated with zero offers. Does no one want this property? How much farther will they have to drop the price?

Interest rates have affected buyers’ buying power. Let’s look at some of the numbers at play here.

What Is the Current Buying Power?

Back in the spring, someone looking at a house for $800k could have gotten a 4% interest rate, leaving them with a $3,819 monthly payment.

Now, interest rates are up to 7%. That same $800k property just jumped to a $5,322 monthly payment. If rates climb to the expected 8% next year, that becomes $5,870/month.

In the first quarter of this year, people could buy comfortably at a $800k price tag. Now, due to interest rates, those same people probably can’t even qualify for a loan that large.

How to Price a Property Based on Buying Power

You have to look at it this way: The monthly payment for this property increased by about $1,500 in a matter of months. That’s a 39% increase. Next year will be a 54% increase from early 2022’s buying power! This puts a major strain on the DTI of a buyer trying to qualify.

But what does this all mean when it comes to how to price the property?

Let’s keep working with our previous example. We have the same buyer wanting to keep the same down payment, same monthly payments, and same DTI. Here’s how their buying power changes:

At the beginning of this year, they could afford a $800,000 home.

Now, those same people could only qualify for $575,000.

Next year, only $520,000.

This reality of buying power needs to inform your listing price.

Deciding Listing Price

We recommended our client to sell for $575,000 – the current buying power of their target buyers.

If this client still has this property into next year, they may need to drop the price all the way to $520,000, just to find a buyer who can qualify.

Example at a Lower Price

The trouble with buying power isn’t specific to higher-value homes. Let’s look at an example from a lower price point.

A $250,000 house, at the beginning of 2022, would have cost a homeowner $1,193/month. Now, that same house would cost the same person $1,663. That’s a 39% increase. From earlier this year to early next year, the monthly payments will have gone up by 54%, to $1,834/month.

These numbers are still probably cheaper than rent for a comparable property. However, that doesn’t necessarily mean buyers will be able to qualify with lenders.

If someone could buy a $250,000 house at the beginning of 2022, now the same exact person could only afford $180,000. By next year, they can only afford $162,000.

Since 2021, buyers have lost 60% of their available purchasing power. The market isn’t the same as it used to be, and unfortunately, your selling expectations need to be adjusted.

Affordability and Quality Decide a House’s Value

Two main things decide how much you can sell for: affordability and value.

Affordability changes for buyers when interest rates change. People qualify for loans and choose houses based on what they can truly afford. If you have a house on the market, you have to sell it for what people can financially manage.

Quality also impacts price point. People expect a different level of quality from an $800k house than a $500k house. Our client could keep the $800,000 price tag if the quality of the house matched that number. In that case, the property begins appealing to a different tier of buyer, whose purchase power can get them that house.

We’re still seeing some of our clients selling properties at high numbers. But it’s because their quality is outstanding, and they’ve gone above and beyond to add value. A poor to average house or flip means a minimum of a 10-20% price cut in this market.

Selling Options In This Market

If you’re struggling with a property on the market, there are a few things you could do.

  • Price based on buying power. You need to think about payment sensitivity, purchase power, and whether your target buyers could qualify for a loan. Use the numbers we looked at in this article to determine how to price the property.
  • Use a DSCR loan. If you don’t want to sell at a loss, this is a good option for you. Take the property off the market, hold for 3+ years with a DSCR loan, and turn it into a rental in the meantime. Put it back on the market when buying power improves.
  • Buy down the rate. If you pay to bring the rate down, you can attract buyers at a slightly higher listing price. Buying down the rate might cost $10,000, but it could save you from discounting the list price by $50k.

Help for How to Price a Property

Do you want a second opinion on the pricing numbers for your property? Are you curious about what a DSCR loan might look like for your property?

Send us an email at Info@HardMoneyMike.com, and we’d be glad to help.

For other real estate investment information, check out our YouTube channel here.

Happy Investing.

What Is a Transactional Loan?

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Many wholesalers need to use transactional funding. Here are the basics – what is a transactional loan?

There are many different types of hard money loans. One less talked about loan is transactional funding.

A transactional loan facilitates funding when someone, usually a wholesaler, is buying a property and selling it the same day.

Here are the basics of transactional funding – what a transactional loan is, when you should use it, and where you can get one.

What Is a Transactional Loan and When Should You Use It?

In the real estate world, transactional funding is a very short-term loan, lasting 1-2 days. Most people who use transactional loans are wholesalers. They have a property under contract, and they need to close on it and sell it to someone else on the same day.

Why Use a Transactional Loan?

Normally in a situation like this, the wholesaler would simply sell the contract. A transactional loan comes in when they can’t easily do that. There are 3 common instances when this might happen.

  1. The contract is not assignable.
  2. Financing for the end buyer does not allow the contract to be transferred.
  3. The wholesaler’s transactional fee is high, and they’d rather not show the end buyer their profit amount.

Example of Transactional Funding

Let’s break down a brief example of a situation that needs a transactional loan.

A wholesaler has a property under contract for $100,000. They have also sold it to someone else for $150,000. They don’t really want their buyer to see that they’re making $50,000. And the person buying might not be happy knowing the wholesaler is making such a steep profit.

The price of the transactional fee can matter to one or both of the parties involved. This is where a transactional loan comes in. Using a loan prevents the buyer from seeing the original price paid for the property.

At the end of the day, both parties ideally make a profit off the property, so the fee amount “shouldn’t” matter. However, everyone has different reactions to money, and using a loan is a safe way to keep the transaction smooth.

What Is a Transactional Loan’s Terminology?

There are a few important terms you’ll hear in the midst of a transaction like this.

The main point of a transactional loan is that it’s used in one day. A lender will fund and be paid back usually within a few hours. In that time, ownership transfers from the original seller to the wholesaler, then from the wholesaler to the end buyer.

With these two transactions happening almost simultaneously, the title company needs a simple way to keep everything straight.

So, they label the person who is originally selling the property the “A” person. The wholesaler is the “B” person. And the “C” person is the end buyer.

Using these labels, a transactional loan has two sides: AB and BC. The AB transaction is the first part, from owner to wholesaler. The BC side is the second half, from wholesaler to buyer.

What Is a Transactional Loan Closing Like?

There are a couple steps that happen on closing day with the typical use of a transactional loan.

First, the lender sends the typical closing documents and the wire on the same day. The lender lets the title company know they won’t fund the loan until the end buyer and their funding is verified. The lender will only approve funding once they’re certain the end buyer will actually complete the process.

A one-day closing requires all three parties to be present and prepared. The AB transaction happens first. Then, a few minutes later, the wholesaler completes the BC transaction with the end buyer.

After everything is signed and completed, the title company does their thing. They complete the paperwork, clear the wires, and send the money back to the transactional loan lender.

By the end of the day, the end buyer owns the property. Plus, the wholesaler made their profit without any potential conflict about the fee.

What Does a Transactional Loan Cost?

Transactional funding costs depend on your LTV, the length of the loan, and your lender.

There are some transactional loans that merge into bridge loan territory and take up to 30 to 60 days. But true transactional funding happens in one day (maximum two). The typical cost is about 1 to 1.5 points for a transactional loan.

If a wholesaler needs a loan for $100,000, then the loan fee would be between $1,000 and $1,500. In the example we used earlier, this would allow the wholesaler to safely charge their $50,000 fee and get around $49,000 of profit.

However, a transactional loan is much less helpful when the wholesaler fee is smaller. If they buy the house for $100,000 and sell for $105,000, then the fee would leave them with a total profit of $3,500 to $4,000. In that case, it’s more worthwhile to sell the contract rather than do a transactional loan.

Transactional deals are for:

  • When the margins are good on a deal.
  • When financing for the end buyer requires it.
  • In a special case where a contract is non-assignable.

Who Does Transactional Funding?

You can get a transactional loan from a hard money lender.

Large lenders typically only loan 80-85% of the original purchase price. Smaller lenders, like Hard Money Mike, typically loan 100%.

We’ve been doing transactional loans for over 20 years. We expect to start doing even more as the economy changes.

If you have a deal, send us an email. We’re happy to look at it, price it out, and see if it’s something we can do. At the very least, we can help walk you through the process. Reach out to us at Info@HardMoneyMike.com.

Happy Investing.

When NOT To Use Hard Money For Real Estate Investing

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Every form of leverage has its time and place. Here’s when not to use hard money.

You need all kinds of leverage as a real estate investor. Different investment problems will call for different kinds of debt solutions.

Hard money, banks, private equity, and OPM all have their time and place. However, there are times when certain lending methods just aren’t smart.

Hard money has a lot of important uses, but when should you not use hard money?

1. When It Costs More

The main time when not to use hard money is whenever it’s the more expensive option.

You get into real estate to make money. Saving money on the leverage for a deal is a top priority.

Hard money is one of the most expensive forms of leverage. If using hard money costs you more than any other lending option, that’s your first sign not to use hard money.

When Is Hard Money More Expensive?

Private equity funds and hard money lenders typically have around the same pricing. The real gap comes when you compare bank loans to hard money.

In a previous article about when you should use hard money, we went over an ideal situation for hard money. In this example, the speed of a hard money loan can get you such a good deal on a property that you wind up saving money.

However, that doesn’t always happen. The cost of the property might not change whether you have a hard money loan or bank loan. You might have plenty of time to wait for the cheaper but slower loan from the bank. In those cases, you almost always should not use hard money.

The interest rate and origination fee for hard money will almost always make it the more expensive loan. Here’s a side-by-side comparison of a hard money loan vs bank loan for the same property.

As you can see, when all else is equal, a hard money loan would cost you over $9,000 more.

Always, always go with the cheapest source of funds. In typical situations, bank loans and OPM will be cheaper than hard money or private equity.

2. When You Have Time

If speed isn’t a factor in getting a good deal, that’s a sign when not to use hard money.

Sometimes, speed at closing can mean the difference between getting a property and not getting it. Or, closing fastest could mean saving tens of thousands of dollars on a deal. Hard money is a good option then.

However, that’s not always the case. Sometimes a seller is willing to wait several weeks for a bank loan to clear in order to take a higher bid.

If time isn’t a consideration, then you probably shouldn’t use hard money.

3. When You Have Real OPM

OPM is money you get from real people you know. If OPM is available to you, you should always use it instead of hard money.

This form of leverage combines the speed and flexibility of a hard money lender with the price (or cheaper) of a bank loan.

If you can source and secure an OPM loan for a project, then there’s usually no reason to get hard money.

4. When You Already Have Money

It’s never smart to use a hard money loan when you already have cheaper funds available – especially when you have cash.

There’s no reason to pay a 9% interest rate when you could pay with a 0% rate, or use a cheaper line of credit like a HELOC.

A time when not to use hard money is when you have an equally flexible funding source that costs way less. In general, when you have cash available, stay away from leverage at all.

How Else Do I Know When Not to Use Hard Money?

What’s the right leverage for you? Are you doing it right? Are you using the best funds for your project?

Join our weekly call-in here, every Thursday at 1:15 PM to 2:15 PM MST to find out! Bring a specific question about a deal, and we can talk through the best option for you.

Happy Investing.

What To Do When Your Flip Is Stuck on the Market

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It’s all too common in times like these – your flip is stuck on the market. Here are your options to save your money.

You got a great deal on a property a couple months ago. You worked hard to fix up the house fast. And now… it’s not selling.

This problem is happening to investors daily. We’re getting a lot of calls from our clients (and other people’s clients!) asking for help.

So, what do you do with a sticky flip?

Your Options When Your Flip Is Stuck on the Market

Obviously, the ideal goal with a flip is to sell at a profit, quickly. That may not be possible under current conditions. If your flip is stuck on the market, you might need to strategize a different exit plan.

Your main options are to:

  1. Keep dropping the price until it sells. Cut your losses and just get rid of the property.
  2. Refinance your flip’s loan. Make your lender happy, but keep the house on the market to try to salvage some profit.
  3. Convert the flip into a rental. Refinance your flip, then hold onto the property for a couple more years, until a good market returns. You can keep a tenant and get some rent income in the meantime.

Which option is right for you? That depends on your goals, willingness to rent, and financial situation. Let’s go over some of these options in detail to help you decide.

First Step in Converting a Flip to a Rental

First of all, if you decide you’d rather turn the flip into a rental, stop lowering the market price immediately.

You can’t drag out this decision, lowering the price “just in case” while exploring rental options.

When you refinance your fix-and-flip, the appraiser looks at the market history. They see the last price the house was listed for. They have to base their appraisal off that number, regardless of whether the house sold or not.

If the last listed price is lower than what they would have appraised the house for… they still have to go with the listed number.

So every time you drop the price, it lowers your potential appraisal. This directly hurts your loan-to-value on a refinance.

Loan Options for Your Flip Stuck on the Market

Once you’ve made the (quick) decision to refinance the property, what are your options?

Typically, you’d go to a bank to get a conforming or traditional loan. But banks are slow, and this refinance needs to happen quickly. Also, with money tightening, bank loans are harder to get than ever.

Here are 3 other options we’d steer you toward:

1. DSCR Loans

The DSCR loan is the easiest, fastest way to get a longer-term rental loan. The core requirements for most DSCR loans are:

  • A good credit score – 680 minimum, with a higher score meaning the better the rates and terms.
  • Rent income – If your rent covers your monthly payments on the loan transaction, you’ll qualify. Some DSCR products will still take you if you lose up to 25% on the loan payment with rent.

If you decide you want to turn your flip into a rental, a DSCR loan should be the first option you consider.

Beware the Prepayment Penalty

All DSCR loans have a prepayment penalty. The standard timeframe is 3 or 5 years. The longer the term for your prepayment penalty, the better the rate.

Prepay penalties are like exit fees. For example, if your term is 5 years, and you decide to pay off the loan during year 3, they’ll charge you 3% of the loan as an exit fee.

2. Bridge Loans

If your flip is stuck on the market, but you want a short-term refinance, then bridge loans could be the better option.

Bridge loans typically last about 1 to 2 years. There are a couple directions you could go with a loan like this:

  • You can keep the house on the market and just use the bridge loan to get out of your original flip loan.
  • You can convert it to a short-term rental (think Airbnb) to bring in some cash flow.
  • You can turn it into a traditional rental while you wait out the market.

Bridge loans are good because they’re fast, interest-only, and have no prepay penalty. The downside of bridge loans is that they’re limited to 70% of the value of the home. Plus, they tend to have higher interest rates.

If your flip is stuck on the market for too long, your original lender will start asking for their money back – potentially raising rates or threatening foreclosure. A bridge loan is a great exit.

DSCR vs Bridge Loan to Refinance Out of a Fix-and-Flip

When deciding whether to go with a DSCR loan or bridge loan, you should consider the “tipping point.” Bridge loans have 2% – 4% higher annual rates. DSCR loans have a prepayment penalty.

Depending on how long you want to keep the loan on the house decides which type of loan will be cheaper for you. This tipping point usually lies somewhere between the 14th and 17th month of a DSCR loan. That’s when the pre-pay fee becomes cheaper than the rates on the bridge loan.

3. Real OPM

Lastly, real OPM is always the ideal funding source to get you out of difficult situations.

Real OPM is real people – family, friends, folks in local real estate groups – who want to put their money in a safe place with an easy return.

An OPM lender can get a 6% to 7% rate of return lending to you over a 2% or 3% rate keeping their money in a bank. You can use OPM to pay back your original lender  and free you up to make the best decision for your flip stuck on the market.

OPM is win-win.

More Help for a Flip Stuck on the Market

We’d be glad to help you find the best loan for your needs.

Reach out now! Rates are only going to rise, and now is the perfect time to get prepared for a market with more opportunities.

Email us at Mike@HardMoneyMike.com.

Happy Investing.

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What Does ARV Mean in Real Estate Investing?

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To profit in real estate investing, you’ll need to know: What does ARV mean?

Real Estate Investing: What Does ARV Mean?

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

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

What Are Comps?

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

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

How To Get an Accurate ARV

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

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

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

What Does ARV Mean for Profit in Real Estate Investing?

Estimated profit is what you expect to make on the transaction between:

  • buying the property
  • fixing it up
  • selling it again.

Additionally, equity is the difference between the amount you owe and what the property is worth. You build equity on your rentals by:

  • buying properties with a low purchase price and a high ARV
  • successfully refinancing after a flip
  • paying down the mortgage with rent income.

If you want to find the true profitability of a deal, then use your ARV and comparables:

ARV – (Purchase Price + Budget) = Profit Amount

Read the full article here.

Watch the video here:

https://youtu.be/4RErCDhSi44

Text: "BRRRR Loan Requirements"

How Will Changing BRRRR Loan Requirements Affect You?

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Lenders are upping the requirements for a BRRRR loan. Here’s what to know to prepare.

BRRRR has two loans – hard money to buy, long-term to refinance. With inflation, both loans will have lower LTVs.

What else should you expect?

Hard Money BRRRR Loan Requirements

Many private money companies – particularly bigger, national lenders – are requiring 20% down.

Hard Money Mike is a little different. We fund using real private money, so our loans aren’t as dictated by federal rates. We still go up to 100% on financing, as long as you’re approved for your long-term loan up-front.

Smaller lenders can give you a better advantage with BRRRR during inflation. But you should still expect many private lenders to offer lower LTVs.

Bank BRRRR Loans with Inflation

Long-term loans are decreasing, making it harder to cash out. Traditional lenders could go down to 70% or 65% LTVs, or just have tougher requirements.

Money is shrinking, so the pot of money available to you on either BRRRR loan is shrinking.

The Plus Side of BRRRR and Inflation

What’s the good in all of this? If you’re in a bad financial position, you’ll have a hard time continuing your real estate career in inflationary times.

But, if you’re in a good position, you’ll be able to find fantastic properties in your pricepoint. And you’ll be able to find them for 20-40% less money than you could a year ago.

Don’t fight what’s happening with the economy – figure out how to use it.

Understand BRRRR loan requirements now. If you get into a BRRRR, fix it fast and refinance fast. Figure out your BRRRR’s long-term loan first before you look for a short-term loan.

Things are changing rapidly in the real estate investment world. Get yourself in the best position to be able to work with it.

Read the full article here.

Watch the video here: