When I began my real estate investing adventure I had many of the same questions I often hear from today’s investors – Why would someone pay hard money rates and fees? How can you be profitable with high cost of capital? Hard money is for broke people with bad credit! But the more I learned about financing, it was clear to me that each type of financing is a tool and like your garage, it is important to have as many tools as possible at your disposal. The beginning of every deal starts with financing – how much down, payment amount, term, loan to value, how long to close, etc. Below are some reasons why you might consider using hard money on your next deal.
Cash to Closing/Down Payment
One of the biggest advantages of hard money versus other types of financing is the high loan to value. Real estate investing can be a capital intensive business, most banks are requiring between 25-40% equity into a deal compared to hard money financing that may cover 100% of your costs on a strong deal. Structuring your financing to limit your cash into each deal will give you the opportunity to do multiple deals at once.
If you are able to close with ZERO money down – How many deals can you do? As many as you can find! With less money into each deal it gives an investor the ability to have multiple projects going at a time. There is nothing more frustrating than watching great deals pass you by because you are waiting for your deal to close, with your FHA buyer that has had to extend the closing two times! I see a lot of borrowers keeping a large amount of cash in the bank (hundreds of thousands in some cases) so that they can do more deals with hard money rather than less deals with large down payments.
In a competitive market a great way to set yourself apart from the other offers on a property is the ability to close quickly. A seasoned investor can decide if they are moving forward on a property in less than 30 minutes, but getting to the closing table is what the seller is looking forward to. A typical lender is taking about six weeks to close a deal right now, which leaves a lot of time for the deal to blow up. Hard money can close as quickly as two weeks and it is not uncommon to close in a week. Put yourself in the seller’s shoes – which offer are you more likely to take?
Less Expensive Than a Partner
I did my first few deals with a partner, I was finding and managing the deals and my partner put up the money, we’d split the profit 50/50. This was a great situation when I was getting started because I didn’t have the capital to fund the deals I was finding. After we did a few deals, I was able to build up reserves, I found that even after paying the fees and interest charged by a hard money lender that I made more on the deal than splitting profits with a partner.
Easy to Qualify
Bank financing has become much more conservative following the last downturn, especially for real estate investors. Banks want to see very strong borrowers – Money in the bank, consistent easy to verify income, great credit, low debt to income ratios and experience. Sometimes real estate investors have trouble showing consistent income as the deals ebb and flow or maybe their money is tied up in a deal they are working on. Hard money lenders are usually more understanding of self-employed borrowers and not as concerned about income and credit as long as the deal makes sense and the borrower can support it.
Often times banks and private money lenders change their loan. It is difficult to do business with lenders whose requirements change if they don’t like the property, location or size of the deal. Private money lenders have a limited amount of money available and could be making commitments to other investors on a first come, first serve basis. Hard money lenders typically stick to their loan program regardless of the deal, they have established their loan to value, pricing and underwriting in a way that fits for a deal regardless of size, location or complexity. Analyzing a deal is much easier when you know what your cost of capital and loan to value on every deal.
Remember hard money is a tool just like any other type of financing and there will be deals that it makes perfect sense for and others that might require a different tool. When analyzing your business plan or next deal, take time to see how things would look using a different financing method.
About Pine Financial Group
Pine Financial Group is the leading hard money lender in Colorado and Minnesota. Originating more than 1,000 hard money loans since 2008 and more than $60 Million in 2015. Everyone at Pine Financial Group, Inc is dedicated to the success of its clients. We only experience success when our clients are succeeding so we have a habit of telling you when a deal should not be done. Isn’t that what you want from a professional in the industry, especially someone that you trust as an adviser? You will benefit from our honesty and integrity when you choose to work with us. Learn more about Pine Financial Group here: www.pinefinancialgroup.com.
Travis Sperr, Senior Loan Officer
Travis Sperr became a licensed real estate agent in Colorado after earning a Bachelor's degree in Business Marketing from the University of Northern Colorado. He joined Pine Financial Group in 2009 as a Loan Officer and is now a speaker, teacher, and frequent contributor to Pine Financial Group’s monthly newsletter. He has been instrumental to Pine's growth both in Colorado and in Minnesota. He now owns and manages aportfolio of rental properties in the Denver-metro area valued over $2 million. Currently his investing is focused on multi-unit new construction projects in the Denver area, recently completing a $3.3 Million dollar project. Participating in real estate investing everyday with more than 600 transactions as a hard money lender, landlord, agent and investor, Travis has found his true passion for the business.
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