Two years ago a heartbeat and a signature could get you 100% financing on a residential rehab project. Today, rehabbers are persona non grata to most commercial banks. Combine that with new financial regulations and exotic lending programs from banks will be sidelined for several years to come, no doubt.
The only problem is, the deals are happening now. Banks and servicers are selling properties at 30-50 cents on the dollar, others are liquidating notes for whatever cash they can find. The investors with cash are cleaning up and putting together portfolios of property that will explode in value over the next few years. But what about the investors without all that cash? Is there no hope for owning an investment property and taking their piece of the american dream?
That's where hard money comes in.
I'm a big fan of hard money, especially in our current credit market, though I will admit, hard money has changed quite a bit in the last two years. Absent of investing all cash, hard money loans are the next best method of taking down residential properties, rehabbing them, and wholesaling them out to other investors and potential homeowners.
For the newbies out there, hard money is a loan that is based purely on the value of the asset being pledged as collateral. They're much easier to qualify for than conventional loans, but are alsomuch more expensive.
Hard money loans are especially good when rehabbing and flipping properties, since you're in the property for much less time (hopefully) the added interest rates (10-18%) won't do too much damage to your profit margin. You will have to watch out for the front end costs,usually between 2 and 6 points, because those numbers will effect your bottom line, and can sometimes lower your net loan proceeds.
Even with hard money you'll still need to put some skin in the game. Most reputable hard money lenders are asking for 20% of the purchase price, though there are still a few holdouts who will fund 50% - 60% of the true property value, which might get you slightly more leverage. It's getting harder and harder to convince hard money lenders that the property you're picking up at has a "true value" twice what you're paying for it.
Before signing on the dotted line for a hard money loan, make sure you are being realistic with your rehab time line. You don't want a 3 month loan term if it will take four months to rehab and sell the property. It's better to pay more for a longer loan than to get it with default interest rates and fees. Give yourself enough time to get in and get out, and don't be afraid to ask for extensions. If you've made your payments on time and haven't fallen behind most hard money lenders will be more than happy to extend your loan, especially if they can charge you for it.
If you're new to the flipping world, or if you're an experienced rehabber but your short on cash these deals are great deals to strike up your first partnership. An $80,000 purchase price will require only $16,000 down payment. Split that two ways and you're into a property for only $8,000 each. $200 for a BPO, clean title, and that's pretty much all you need to get started with a hard money loan.
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