Six tips for making money with hard money loans
If you’re a real estate investor looking to fix and flip properties, chances are you’ve heard of hard money loans. Hard money loans meet the needs of investors by providing them with the leverage they need to compete with all-cash offerings. Conventional lenders don’t lend on distressed properties that take too long to close and have complex underwriting criteria. There are many benefits to lending hard money, but hard money lending isn’t for everyone. To successfully flip using hard money loans, follow these six simple tips.
Spend time choosing a hard money lender that’s right for you
Avoid brokers and choose a direct lender. Direct lenders lend their own money and are more flexible in underwriting. Real estate is a local business, so you’ll be best served by a lender who knows your area well and can save you from mistakes. Look for someone with a reputation for credibility and transparency. Take a look at their online reviews and, if possible, ask for recommendations from other investors and your real estate agent.
Understand the profit potential of your trade
A strong blue chip lender will avoid financing transactions that generate low profits. Nevertheless, it is your duty to learn how to identify lucrative opportunities and avoid trades that are not worth it. Find a good hard money calculator and learn how to use it. Do not rely on your agent to find the expected after repair value. Run your own comps based on recently sold prices of similar homes in the neighborhood where you are buying.
Find a trustworthy contractor and manage it well
The right contractor is essential for your success. Find one that is both cheap and reliable. If you are new to rehabilitation, ask several contractors to submit their quotes. You want value for money, but don’t go after the lowest price: you want to make sure your contractor won’t bombard you with requests for additional funds once the process begins. Maintain as much control and oversight of the process as your time allows. If possible, ask your contractor to separate their material and labor costs into separate categories.
Don’t drag your feet to repay your loan
Hard money loans are not cheap. To reduce their cost, you should aim to pay them off sooner rather than later. Make sure your money lender does not have a prepayment penalty. “We encourage our borrowers to repay our loans as quickly as possible,” says Anastasia Sennott, partner at New Funding Resources, a Maryland hard money lender. “The faster they rehabilitate and sell the property, the more money they make, and we can deploy the funds elsewhere.”
Keep enough savings to meet your obligations
Why do you need reserves? Because you have to make monthly payments to your lender. Because life happens and things break. You may not have planned to work on this roof, but the first heavy rain made its problems apparent. Your contractor may have dropped the tub and now you need to buy a new one. Taxes are as sure as death and you must pay them. The truth is that owning real estate is expensive, and until you sell it and make a profit, you will constantly need money to take care of one problem or another.
A reputable lender will facilitate access to decision makers and have knowledgeable and responsive support staff. Be sure to do your part to keep them up to date. If you have any problems, let your lender know. Together, you can work on a solution that minimizes risk exposure for all parties involved.