Throughout the years I’ve spent as a real estate agent, I’ve seen several methods people use to invest in real estate. Some investors choose to buy property to renovate then flip, or sell at a higher value. Others choose to buy, hold onto, and rent and enjoy the monthly income. Some investors use their cash to purchase these properties, but most will use financing (or someone else’s money). I will stop short of telling you about what “ABC Bank” or “ABC Mortgage” have to offer because there so many out there. One innovative way that I’m seeing more investors use to finance their properties is HARD MONEY.
After Repair Value (ARV)
Hard money lenders are third parties, private lenders who, for the most part, don’t base your ability to finance solely on your credit, assets, or even your ability to make your payments. They are more concerned about the After Repair Value (ARV). After Repair Value pertains to a property’s current value in its current condition vs. its potential value once it’s renovated
Hypothetically, lets say you choose to buy and invest in a property. Said property is currently worth $100,000 in it’s current condition. Most comparable homes in the same neighborhood are selling for $200,000 (move-in ready). The subject property needs about $40,000 in repairs. Most hard money lenders will finance up to 70% of a property’s after repair value. This property’s potential value is $200,000 if homes in the neighborhood are selling around $200,000. The lender may finance up to $140,000 (70% of $200,000). That gives you $140,000 in cash to purchase the home. Out of the $140,000 cash that the hard money lender finances you, you buy the property at $100,000 and spend $40,000 to renovate. Let’s say you put the property for sale at $200,000 with a realtor to maximize the home’s potential to profit, and it sells for $200,000. After the closing of the sale, you pay back the $140,000 loan to the hard money lender. Sold at $200,000 – $140,000 loan = $60,000 in your pocket. (This doesn’t take into account origination fees)
This is the hard money loan in its simplest form. Additional charges with hard money loans include a higher interest rate. I’ve seen hard money lenders charge 10%-18% interest on their loans, at 3-6 points (3%-6% down payment). Yes it’s high, but remember, the investor isn’t trying to live in this property for 30 years. The purpose is to finance an investment, renovate it, and sell as quickly as possible. If a borrower cannot do this in a reasonable amount of time, the costs add up. Time = Money Lost. Typically, hard money lenders will require a borrower to have the ability to convert the loan to conventional financing from a bank/mortgage lender within a year if they aren’t able to sell. Word to the wise: Rehab and sell as quickly as possible. I also didn’t take into account any Realtor fees that may apply when you list your property.
One wonderful thing to consider with Hard Money Loans is the ease of obtaining them. Usually they’ll take 7-14 days to finance without the red tape and appraisals that regular mortgages require. Whenever you purchase a property using hard money, it is essentially a cash transaction for all intents to the seller.
This example is just one variation of hard money lending. The process and numbers vary from lender to lender, and situation to situation. This is just one common way that I’ve seen here in Austin.
Some of the most common properties investors tend to purchase for flip and/or rent are foreclosures. Visit my foreclosure blog for more information on these great properties with high equity potential.
Contact me if you’re looking for a hard money lender to use in the Austin and surrounding areas.
You’re invited to leave comments below. Feel free to ask questions, or chime in on how you were able to use hard money to flip your property.
You’re welcome to visit my website to find properties to flip