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How Hard Money Lending Can Benefit You

Gone are the days when the thought of hard money lenders evoked images of shady lenders doing deals in dark alleys. Hard money lending has evolved into a reputable financing source for many people. There’s a lot of things that hard money lenders can do for you.

The Benefits of Hard Money Lending

Fast Process

Traditional lenders engage in a slow process, even if you have a good income and a good credit score. Hard money lenders take a different approach. Hard money lenders lend based on the collateral securing the loan. With this approach, they are not concerned about how you can pay the loan back. A hard money lender will just take the collateral and sell it in order to get repaid. That being said, your collateral’s value takes precedence over your financial position. Because hard money lenders are focused on collateral, the loan can be closed much more quickly than a traditional one. Hard money lenders do linger going through your loan application with a fine-tooth comb. They don’t spend time reviewing your income or verifying your current income. As a result, the loan process moves more quickly than a traditional loan. You can close a deal quickly with a hard money lender. And that’s very important in a hot market. You’ve got to be able to move fast.

Flexibility

With a hard money lender, you get some flexibility when compared to a traditional loan. Each deal is evaluated individually, instead of utilizing a standardized underwriting process. In addition, a hard money lender is much more willing to talk with you. It may be possible for you to tweak some things, such as repayment schedules. Instead of dealing with a bank with strict policies, the policies of a hard money lender are flexible.

Approval

Since the most important criteria for a hard money lender is collateral, approval is much more likely. A hard money lender will lend only as much as the property’s worth. If you need to borrow against a different property, that’s the value of that property will be what the hard money lender is interested in. Negative items on your credit report or previous foreclosures are much less important to a hard money lender than a traditional lender. Keep in mind that many hard money lenders maintain loan-to-value ratios (LTV). Their maximum LTV ratio may be from 50 percent to 70 percent. That’s a low ratio and hard money lenders know that they can sell the property quickly to get their money back. So, you’ll need some assets to qualify for a hard money loan. The bottom line is that your approval is much greater with a hard money lender.

Keep in mind that hard money loans make good sense for short term loans. That’s why so many fix-and-flip investors use hard money loans. Investors own the property just long enough to increase the value of the property. Then, they sell the property and repay the loan. This is often done within a year. If an investor plans for a longer time, he usually refinances for a better loan.

All around, the benefits of hard money lending are good when you know what you’re doing.

 

image of couple fixing and flipping a house

4 Things to Avoid When Fixing and Flipping a Property

Diving into the real estate investment world can be very exciting—and there’s certainly a lot of money to be made. If you don’t have much experience or haven’t done your research, though, your first fix-and-flip could end up being a disaster. By being aware of some of the most common mistakes investors make with fix-and-flip properties and how to avoid them, you can come out on top.

Paying Too Much for the Property

Start with knowing how to determine a fair asking price for the property in question. Many factors need to be taken into consideration when deciding how much to pay for an investment property, including:

  • the location
  • square footage
  • number of bedrooms/bathrooms
  • overall condition

And of course, you’ll also need to consider how much you’ll be able to realistically sell the property for once you’ve made the improvements. Make sure an investment property is going to be worth your time and will actually pay off in the long-run. Otherwise, you’re setting yourself up for failure right from the beginning.

Doing Too Much (Or Too Little)

Deciding on how to spend your renovation budget on a fix-and-flip property is a very precise science. You’ll need to have a solid understanding of which improvements and repairs will ultimately yield you the best return on your investment. From there, you can make smart choices moving forward.

For example, did you know that adding a wooden deck or patio on an investment property can bring in as much as a 90% return on your investment? Other projects to consider that can really pay off include bathroom/kitchen upgrades and landscaping improvements.

Choosing the Wrong Professionals

Even if you consider yourself a DIY expert, you won’t want to take on an entire fix-and-flip yourself. Instead, your time and resources will be better spent making big-picture decisions and overseeing a team of experienced and licensed professionals.

The contractors you choose to trust with your property’s repairs and improvements can have a huge impact on the results—and on your bottom line. Take the time to screen and interview potential contractors, and always make sure they’re properly licensed, bonded, and insured.

Making Polarizing Design Choices

Ultimately, your goal with an investment property should be to appeal to as large of an audience of potential buyers as possible. This means that you’ll want to avoid making polarizing design choices and keep things neutral instead. As much as you might love the idea of installing a bright and bold backsplash tile in the kitchen, you’ll probably get better feedback from potential buyers if you stick with something neutral and in-demand, like a white subway tile backsplash.

As you can see, there’s a lot to keep in mind when it comes to taking on a fix-and-flip property. By starting with the right purchase price and choosing a team of reputable contractors to carry out your projects, you’ll be well on your way to making some money with your first real estate investment!

9 Commonly Asked Questions About Hard Money Loans

Not everyone is as familiar with hard money loans in Arizona as they are with traditional lending. However, these private loans can provide a benefit over other methods of lending. Before you explore this option for your business ventures, it can be beneficial to understand the answers to these common questions.

What Makes Hard Money Loans Different?

Hard money loans utilize the value of the property itself as the only collateral. This means the buyer’s assets and credit history have little to no bearing on their ability to get the financing they need. In addition, these loans come from private lenders who can set their own requirements.

How Do Interest Rates Vary?

In general, the interest charged on hard money loans is often higher than traditional loans because they are meant to be a short-term solution. However, underwriting and other costs are typically lower. These loans are sometimes used as interest-only loans with the principal due at the end or may work more like traditional loans with principal and interest factored into the payments.

How Does the Application Process Work?

Applying for hard money loans requires submitting a request to the investor themselves, rather than a banker who doesn’t have the final say. This can give you leverage for negotiations.

What Loan to Value Ratios Affect the Loan?

For the most part, loan to value ratios for hard money loans in Arizona fall between 50 and 65 percent. This rate can be based on the actual purchase price of the property or the prospective value of the property after repairs and improvements are made, whichever is higher. Banks typically use the lower of the two numbers for traditional lending.

How Long Do These Loans Last?

Hard money loans are designed to be used for shorter term solutions than traditional loans. Most of these loans last as little as six months but can be used up to two years when needed.

How Much Do They Cost?

One of the biggest concerns is cost. Buyers are typically required to pay for any underwriting services, including third-party appraisals and environmental reports, among others. However, it’s important to understand how much these fees should be to avoid lenders who are only looking to scam business owners.

Does Borrower Credit Matter?

If you’ve ever obtained a traditional bank loan, you know how important your credit is to obtaining a low interest rate and the funding your need for your business ventures. With hard money loans in Arizona, your credit will have little to no bearing on whether you will qualify for the loan. Instead, the loan will be based more on your character and the value of the property.

Do You Need Money Down?

In most cases, you will need to put some money down to mitigate the risk the lender is taking on. It also ensures buyers are more invested in the property and are less likely to just walk away and not pay the loan back.

Keyword: hard money loans Arizona