You want to be a bona fide real estate investor. You covet
the money, the lifestyle and the freedom. A lack of working
capital is holding you back. Or maybe your credit
challenges are standing in the way of qualifying for
reasonable financing terms. Don't despair. It can be done.
As a matter of fact, a great number of real estate
investors almost never utilize their own cash or credit to
profit from their investments, at least not in the
beginning of their careers. In the following weeks, I will
be discussing three ways you can invest in real estate
without using your cash or credit. As you grow as a real
estate investor, you will continually discover creative
ways to invest in your deals. Once you have the experience,
finding the money will become secondary to finding the
deal. This is all part of the fun. Hard Money Lenders
Hard money lenders are a great way to fund your initial
investments. Granted, they are expensive; their rates will
make you cringe, their loan-to-value ratios are low, and
they usually slap on a prepayment penalty. On the other
hand, if you have a deal under contract with a conservative
loan-to-value ratio of 65-70% that you need to close in a
hurry and you don't have stellar credit history, then a
hard money lender may be perfect for you.
Before agreeing to anything in writing, be clear as to the
stipulations of the proposed financing. These are important
items to keep in mind:
1. Total cost of the loan
Ask the lender about their origination fees and processing
fees as well as title and escrow charges. Request a good
faith estimate. Hard money lenders are not regulated in the
way that traditional mortgage lenders are. Expect their
fees to be significantly higher, two to ten points in
origination alone. Remember, all fees are negotiable.
2. Negotiate the prepayment penalty
If you are flipping, you only need a loan for a few months
until resale. Request an interest guarantee in lieu of a
prepayment penalty. An interest guarantee differs from a
standard prepayment penalty in that the lender will collect
a certain amount of interest form the funds they lend to
you regardless of when the loan is paid off. A typical
prepayment penalty is for one to three years; therefore, if
you pay off the loan prior to the expiration of the
prepayment penalty, you will be obligated to pay
approximately the equivalent of six months worth of
interest on your loan as a penalty.
With an interest guarantee, every time you make a payment
on your loan, the interest portion will be considered as
payment towards your interest guarantee. This means that if
you take out a loan with an interest guarantee of six
months and you sell the property within four months, you
will only owe the hard money lender two months worth of
interest at resale. Interest guarantees are usually a
better deal.
It is common for the lender to request a six-month interest
guarantee, which is the standard amount of a prepayment
penalty. Just like everything else associated with real
estate investing, this is completely negotiable. Request
two or three months and see what happens. Do the math!
Make sure that interest guarantee makes financial sense.
3. Request no out-of-pocket investment
This is exactly what it says: you do not invest anything
out of pocket in order to close the loan. All you can do is
ask. This will probably make the lender somewhat
uncomfortable, although he or she may be inclined to forgo
a cash investment since the approval of the loan is largely
based on the After-Repair-Value of your property. The
majority of lenders want to ensure you have enough
resources to cover the cost of repairs, closing costs and
holding costs. They expect borrowers to pay for loan
charges at or before close of escrow.
4. Request money for repairs
It is possible to receive a draw for repairs. Most lenders
will require invoices from contractors and subcontractors
before the work is completed. Draws are usually disbursed
once the completed work is inspected.
5. Request deferred interest
Some lenders will consider deferring interest payments
until the total loan pay off. This is typically offered
only with short-term loans with maturity dates of less than
six months. For longer-term loans, the lender may still
defer interest during the rehab period. Again, asking for
what you want is a crucial part of the process.
6. Have a clearly defined exit strategy
Hard money loans are interim loans that stay in place for
up to three years. They are a temporary solution to an
investor's financial predicament. The lender will want to
know if you plan to keep the property for cash flow
purposes or if you plan to sell before the end of the loan
period. In either case, the lender will want to know how
you plan to execute your course of action. Your exit
strategy is very important because it informs the lender of
exactly how you anticipate repaying the loan and confirms
whether approving the loan will benefit everybody involved.
7. Shop around
When it comes to real estate, everything is negotiable. It
is essential to comparison shop. Don't be afraid to inform
your lender that you are looking for a great deal. This may
give you a stronger negotiating position. Sure, you will
run across a lender or two who will slam the door in your
face. Nevertheless, this is a numbers game. The more people
you connect with, the better your chances of finding a good
lender to work with on a regular basis. So, go out there
and find the best deal you can get. Note: Another benefit
to using a Hard-Money Lender is that you can use their
funds for short sales as well.
Hard-Money Lenders are just one way to invest without using
your own cash. Again, shopping around for a good lender
and establishing a good relationship with that lender are
key factors in your success as a real estate investor.
Using a Hard-Money Lender is a great way to close a deal,
yet there are still more options. Another option will be
discussed in Part 2 of this three part series.
----------------------------------------------------
Brenda Coté is a Real Estate Investor, Real Estate
and Mortgage Broker, Mentor, and Wealth Coach. At
Transforming Lives, Creating Wealth, Brenda employs a
"whole person" approach to support female Real Estate
Investors succeed in business and life. To download
Brenda's FREE audio workshop, "The Seven Elements of a
Wealth-Creation Mindset" please go to:
http://www.TransformingLivesCreatingWealth.com
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