Using hard money lenders
Hard money loans are basically a form of short-term borrowing available to property investors. They are like bridge loans, in that they are designed to get in and out of very quickly. Hard money loans are typically used by those in dire financial straits, like borrowers facing foreclosure or bankruptcy. But property investors utilize their services as well – and with good reason. Simply put, hard money loans are a much better alternative to all cash deals.
The average hard money investment property loan is supplied with capital put up by private investors – usually as a pool of money that is used to drive much greater profits for its investors. This private capital is traditionally unregulated, which gives the hard money industry a kind of “Wild, Wild West” feel to it’s practices and reputation. Pejoratively, many consider hard money lenders as sharks feeding off the misery of those in bad financial straits. As a property investor, you will certainly need to approach any hard money investment property loan with a great deal of caution and foresight prior to signing on the dotted line.
Who hard money is designed for…
That said, if you do not have excellent credit, or if you’re self-employed with much income written off, or if you are investing money from a self-directed IRA, then it may be difficult for you to obtain conventional mortgage financing. You could pay all cash for your next property acquisition. But hard money lenders allow you the ability to utilize leverage – even in the short term.
Think of hard money lending as a local train on the real estate train line. Conventional bank loans are quite onerous to qualify for, but they offer the best rates and terms for property investors. They are like the express trains on the line. Hard money investment property loans are like local trains in that you will need to continually be stopping off at more points along the route. Points where you need to pay off your existing short term loan’s balloon payment by taking out another short-term loan to supercede it.
Is this more costly, time consuming and fear-provoking? Absolutely. But, hey – you’re a property investor. You should be used to living with debt and risk – and be comfortable with it. Your safety is knowing there are always going to be hard money lenders out there with their private funds to ensure you make it through to your next “stop” on the line.
While paying all cash for a property is the “safe” way of investing, it provides no way to leverage your financial strength. Assuming you could not obtain conventional financing, hard money lenders offer the next best alternative to all cash deals. While your cash flow will be severely impacted because of the relatively exorbitant interest payments on hard money loans, even a small positive cash flow will yield great leverage over several years of making timely payments on the loan. Remember, besides the cash you put up on the property as your down payment, you will be paying off the principal on your hard money loan each month – thereby helping to increase your return on investment (ROI). Over several years, a small positive cash flow will yield much greater ROI’s than an all cash purchase would.
Costs for hard money investment property loans
If you’re going swimming amongst the sharks, your protective shark cage is knowledge. You need to know ahead of time that typical hard money loans carry interest rates that can run anywhere between 12 and 18 percent. Balloon payment are de rigeur, and these mortgages usually come due within 1 to 3 years. In all but rare instances, hard money lenders require being in the first mortgage position, so they can get their money out first if you default.
In addition, typical loan-to-value (LTV) ratios on hard money investment property loans range between 50% to 65%. And this LTV is based upon the “quick sale” market value of the property…that is – what the property will fetch today – not three months from now after you’ve fixed it up. Another potentially scary cost to take into account are points (up front interest charges). Typically, they can run anywhere between 4 to 8 percent of the total mortgage amount.
Not for the faint of heart
As a borrower, the hard money loan is definitely not for the faint of heart. You should already be comfortable taking on more debt, especially of the short term variety. You should also be well aware of the consequences in case of default.
The hard money lender takes on the increased risk of borrowers with less-than-stellar credit. For this, they are able to charge exorbitant interest rates, with onerous terms, and even more Draconian conditions if the borrower defaults.
A mature, responsible investment property investor/borrower should not be scared off by the terms of a hard money loan. They realize they can use the leverage to their advantage to help grow their real estate holdings. And they enter into hard money investment property loans with eyes wide open.
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Now is the time to utilize all investment property finance options
The latest news for property investors is that according to the National Association of Realtors, pending house sales are rising. Their index of pending home sales indicates a 4.1% increase in March compared to February, and is almost 13% higher than March of last year. This information reflects contracts on houses that have been signed but have not closed yet.
The index is also now showing that pending home sales are at their highest level since April of 2010. In this first quarter alone, closings were at their highest level for a first quarter in five years. The indications from the March pending home sales index now suggest that actual second quarter sales will be very good as well.
Sales are considered “pending” when contracts have been signed but the deal has not closed, so the sale has not been finalized yet. Closings usually take 1 to 2 months after contracts are signed to finalize. The latest pending home sales index is based on a very large national sample and represents about 20% of existing sales transactions.
The bottom has been reached
As I had written back in mid-March, I firmly believe from all the economic indicators over the last couple months that the bottom of the real estate market has been reached. Now is clearly the best time to be considering all your investment property finance options. Increased sales are very gradually lowering the inventory of houses on the market, including short sales and foreclosures. So as this year goes on, stabilization of the market will see a slight increase in house values.
Other indicators showing a clear-cut flat-lining and bottoming out of the real estate market include first quarter sales results, especially in the Northeast. In this region, house inventories have remained steady, days on the market have been dropping slightly, and house prices have remained flat overall during the last few months. Compared to the precipitous price drops, inventory increases, and increased time on the market data of the last several years, a flat-lining of the market is good news indeed.
The ramifications for the property investor
So what does this all mean for the property investor? As I’ve been saying for months now, if you haven’t already decided to get into the market by either purchasing your first investment property, or adding on to your stable of properties, then this is the time to do it. You need to get in before prices start rising. All signs point to the second half of 2012 as a continued slow recovery period. However, it is expected that 2013 will start to see some serious price increases occurring in the real estate market across the country.
So clearly this is the time to get in on the investment property bandwagon, as prices remain at their relatively lowest point in years. The bottom has definitely been reached. And you should be exploring all your investment property finance options now. Whether you decide upon utilizing conventional mortgages, FHA 203K renovation loans, owner financing or hard money lenders, the window is slowly closing on making good deals on investment property while they remain priced at historically low levels.
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