This article is a bit different from my long-term strategy, but will hit home to many Real Estate investors. I fix and flip homes as well as invest in long-term rentals. Fixing and flipping helps me get the capital to invest in long-term rentals. I am going to discuss the financing options for short-term loans that are used mostly for fix and flipping, but can also be applied to rental properties if money is needed quickly before long-term financing can be put in place.
Private money is money that comes from a private individual. They are not a bank, mortgage company, hard money lender or portfolio lender, they are just a person. Regular people will lend money on Real Estate because interest rates on other secured investments are really, really low right now. Have you looked at what the rate is on a CD? For a five-year CD the average is less than 1%! You can’t even come close to keeping up with inflation with that rate. Many wealthy individuals are looking for a higher yield investment that is still secured. Loaning on Real Estate may be the perfect answer for them and create great opportunities for investors.
The biggest problem with private money is finding the person to lend you private money! There are many websites that claim to have private money lenders they can connect you with for a small fee. In my experience those websites take your money and connect you with a Hard Money lender at best. A real private money-lender wants to lend their money to someone they know and trust. They don’t want to lend money to a complete stranger who may or may not be trustworthy and have a clue what they are doing. I am still trying to find a source for good private lenders, but I think I am limited to one option. People I know. I use private money now from my sister who wants a better return on her sons college money. She trusts me, knows I know how to make money and is willing to lender her money out at a very reasonable rate, 7% with no points. For her, this is a much higher rate than she could get with a CD or other secured investment and for us it is much cheaper than hard money, or our bank. She also lends us 100% loan to value!
Hard Money is another option to finance short-term loans. Hard Money lenders each have very different models on lending guidelines and terms. The first thing you will notice with Hard Money Lenders is they charge a very high interest rate. Most Hard Money Lenders are charging 14 to 16 percent and points for their money. Points are a percentage of the total loan and can add up quickly when a Hard Money lender is charging 2, 3 or even 4 points on a loan. The advantage of a hard-money lender is some will loan the entire amount of money you will need to complete a deal. Most Hard Money Lenders base the amount of the loan on the After Repaired Value or ARV. You may hear they will loan 65 or 70 percent of ARV, that is not the purchase price, that is how much the house will be worth once you fix up the home.
Here is an example of how one Hard Money Company structures a deal. You buy a home for $60,000, the ARV is $130,000 and the lender will go up to 70% ARV. They will loan up to $91,000 on the house based on the ARV. They will need bids or estimates for repairs and pay out the money for the repairs like a construction loan. They will pay 25% of the repairs needed at closing and the other 1/4 increments as the repairs are completed. They won’t charge you any interest or points until you sell the home and then you pay them one large payment for the loan principle, interest and points. This particular Hard Money Lender charges 15% interest and 4 points, but they will reduce the points paid after you do a few deals with them.
As you can see the cost to do this deal with a Hard Money Lender can add up quickly. The interest will cost you $6,825 and the points will cost you $3,640 if you use the money for 6 months. There are also Hard Money Lenders that will charge lower interest and points, but will want a split of your profits. I don’t use hard money lenders myself because of how much they charge, but for investors who have no other options it can work out well.
Hard-money refinance to Fannie Mae loan
I have learned of a new technique since I originally posted this article. It allows an investor to possibly buy a rental property with no money down using hard money. If you were to obtain a hard money loan and they would finance repairs as well, you can refinance that loan with no seasoning period according to Fannie guidelines. For example, buy a home for $100k with hard-money loaning 100% of purchase price plus $35k in repairs. Total loan is now $135k, you fix up the home and refinance using a Fannie loan, which will loan up to 75% of the new appraised value. If the appraisal comes in at $185k then you could finance up to $135k, but Fannie guidelines will not allow a cash out refinance. You would be able to refinance the full $130k that was loaned to you buy the hard-money lender. This technique can be rather expensive, because you have to pay the higher interest rate on the hard-money loan, the initial points and then the refinance costs with Fannie Mae.
There are some banks who will still do the short-term loans for investors. They are very hard to find and usually you must have a great relationship with the bank. We use a bank to finance many of our short-term investments. They charge around 8% interest rate and 1 point on our loans. This really is a great deal for us and for the bank, but the bank is constantly changing our agreement because they are being pressured by banking regulators not to do these types of loans. They will only give us 75% Loan to value on our original purchase and can take a week or two to get us the money. In the past they would finance 100% loan to value and fund us the same day. I am afraid those days are gone forever.
Traditional banks can offer another short-term option in the form of lines of credit. Most banks will want collateral in the form of Real Estate in order to issue a line of credit. If you have a house with equity in it, you should be able to get a line of credit from your bank. My bank charges 5% interest rate and will go up to 90% loan to value on my personal residence or 80% on an investment property.
We use a mix of traditional banks, lines of credit and private money to fund our deals. We are lucky that we have private money available and cash to complete a lot of deals. We will usually get the bank loan for 75% of the purchase price, use private money for the rest of the down payment and use our own money for repairs.
How do you structure your deals and are you finding more options for short-term money?