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The truth about hard money investment funding
Now that the real estate market is up and running again, you may be considering diving into this very lucrative market. But where can you find the funds you need to make a serious go of it? The answer, for many investors, is Hard Money financing.
But that answer can also come with questions.
Many investors have heard horror stories about hard money lending tactics and the consequences of not making timely repayment. Don’t let the rumor mill chase you away. Hard money lending is a legitimate financing source that can be a tremendous way to get started in real estate investing – or keep the cash flowing when you need it.
It’s a fact that hard money financing is not for every borrower or every situation. In most cases, hard money loans are secured for quick turnaround, rehab and flip situations. If you are interested in a traditional rental or long-term investment situation, then hard money may not be for you. However, some investors use hard money in the short term to increase collateral value before transitioning into a conventional loan.
One of the best reasons to consider hard money lending is time factor. When you find a potential investment property, time is rarely on your side. There will be other interested investors, so you need to be ready to sign that purchase contract ASAP. Hard money loans can fund very quickly, typically within 72 hours of receiving the final docs from the title company.
Some investors steer clear of hard money loans because they are leery of high interest rates. While it is true that you won’t be getting a prime rate on a hard money investment, you can mitigate the costs by financing interest only. Rates generally range between 10 and 18 percent on interest only annual loans. In some cases lenders are willing to defer payments to your payoff, which benefit investors who don’t want make payments while they are rehabbing or remodeling an investment property.
Will creditworthiness impact hard money financing? Probably. The lender will check your credit, but your score will matter less than any bankruptcies, foreclosures, charge offs or collections. In other words, they are looking specifically for a realistic ability to repay the loan. Investors want to make money, they don’t really want your property. But collateral does matter. In fact, when it comes to hard money lending, collateral is a primary concern.
Regardless of credit and collateral consideration, investors should expect to put some money down. Lenders need to know you have the resources necessary to make repairs and cover the costs of the loan, as well as any “yeah, buts” that come during the process. Expect to pay the associated fees as well as the origination points before closing. Lenders typically believe an investor who cannot afford to close cannot afford this sort of loan.
Because they are strictly for investment and rehab, hard money investment loans typically begin at three months and extend no longer than twelve months. Special arrangements and extensions can be found, but they will require additional fees and other considerations.
In addition to your financing fees, typical fees include the title policy, insurance and appraisal. These fees can total anywhere from several hundred to a couple thousand dollars.
Can an investor secure funding for necessary repairs and remodeling? In a word: YES. Funding sources will typically not pay for repairs up front. They will require that you fill out a “Draw Request” form to detail the completed repairs. You will also need to submit copies of the invoices from the contractors or subcontractors. Once the work has been completed and inspected, those draws can be dispersed.
CAVEAT: It bears saying, though most investors will be aware of this, as with all funding sources, loans must be adequately collateralized to receive funding.