Do you want to get started in real estate investing? Are you thinking about taking out a real estate loan in the future? Regardless of what camp you fall into, you need to understand the basics of real estate loans. There are multiple types of real estate loans available, and you need to familiarize yourself with the basics if you want to put yourself in the best position possible to find the right loan to meet your needs.
What do you need to know about real estate loans before you start the application process? When do you apply for a real estate loan, you want to maximize your leverage, but you also don’t want to take out more money than you can afford. Learn about the fundamentals below, and do not hesitate to reach out to a professional who can help you.
The Strategy
Before you start the process of applying for a loan, you need to have a strategy in mind. How do you plan on using this property? Of course, one option is to live in the property yourself, but if you are interested in real estate as an investment, you have two general options.
The first option is to fix the house and flip it. In this process, you will purchase a house that requires a lot of repairs. Then, you will find someone to do the repairs at a price that you think is fair. Then, you will try to sell the house, making a profit not only on the purchase price but also on the money you spent repairing the house.
The other option is to use the property as a rental property. Even if you decide to rent the property out to somebody else, you need to decide how you will go about this process. Are you planning on using the property as a vacation home? In that situation, you will have a lot of turnover because people will come and go a lot. Or, are you interested in using the house as a long-term rental? In that case, you would be looking for a stable renter to provide you with a long-term solution.
You need to think about your goals, the type of property you are looking at, and what works best for your needs.
The Purchase Price of the Property
You also need to be familiar with the numbers you will see on the page. What does a real estate loan look like? What do you need to know about the contract? The first number is the purchase price. This refers to how much money you are paying for the property. This is not necessarily how much the property is worth. How much you pay for the property is dependent on the market and your negotiating skills. How much the property is worth is largely dependent on the value of similar properties that have sold recently.
The purchase price of the home is foundational to whether you can turn a profit on the property. If you feel like you would have to spend too much money to buy the house, then you may not want to agree to the contract. After all, if you can’t turn a profit on the property, you are probably better off looking elsewhere.
How Much Work You Need To Do
You need to figure out how much work you need to do to the property. Regardless of whether you are planning on flipping it or keeping it, there will probably be some work that you have to do. The amount of work you have to do on the property will impact the profit you walk away with. Therefore, this goes hand-in-hand with the purchase price of the property.
The work you have to do to the property is not the same as the budget. The budget is how much money you are willing to spend. The scope of work is a list of all of the work you have to do to get the property either livable or sellable. For example, do you plan on fixing the electrical system? Do you need to replace all the pipes in the home? Do you need to add an egress window to the basement to add it to the square footage of the house?
You might even want to reach out to another professional who can help you figure out what should be done to the property. That way, you have some idea of how much work you have to do before you purchase the property.
Your Budget
Now, it is time to think about how much money you are willing to spend on the process. As you work with a lender, you should have a birds-eye view of how much money you are willing to spend. The amount of money you should spend depends not only on your own finances but also on how much money you think the house is worth. Keep in mind that you not only have to purchase the house but also do some work.
You should think about how much money it will cost to accomplish every item on the list. If you have to replace all of the pipes in the home, how much money do you think that will cost? If you have to rip out some bathroom fixtures, how much money do you think it will cost to replace them? Even though you might be able to do some of this work on your own, you might need to hire contractors to do other tasks for you. If you need to hire contractors, how much money do you have to pay them?
Once you have some idea of how much it will cost to fix the house, add it to the purchase price to figure out the total cost of the project.
Understanding Profit and Equity
Now, it is time to figure out how much profit you will make on the project. Equity is the difference between the amount of money you owe on the loan and what the property is worth. The best way to build up equity is to purchase a house that will not only appreciate in value but also provide you with an opportunity to pay off the loan using your rental income.
The biggest reason to become a real estate investor is that you want to create wealth. It is true for both lenders and yourself. You need to have an estimated profit you will turn on the project and how much equity you think you should have in the property before the lender will approve you.
Comparable Properties
So, the best way to figure out how much your property is worth is to compare it to similar properties in the area. At the same time, similar properties that have sold recently might have been in better shape than the one you are interested in purchasing. That is why you need to focus on ARV, which is the after-repair value of the property. This is what you think the property will appraise and sell for after you are done with the project.
As suggested above, the best way to figure out the after-repair value of the property is to take a look at similar properties in the area. You should look at properties that are in the same ZIP code or neighborhood, properties that have the same square footage, and properties that were built around the same time. You need to have an accurate list of comparables if you want your project to generate the profit you expect.
Your Exit Strategy: How To Get Out
Finally, you need to have an exit strategy in mind. This means you need to have a plan for paying off a loan. If you are interested in taking out a hard money loan, you have two options. You either need to replace the hard money loan with a refinance. Or, you need to sell the house after you flip it. When you approach the lender, you should have an exit strategy in mind. That way, the lender will feel more comfortable giving you the loan, and you can maximize your chances of being approved. How do you plan on getting out from under the loan?
Work With Barrett Financial Group for Your Real Estate Loans
If you are looking for hard money lenders in Arizona who can help you, it would be our pleasure to assist you. We are Barrett Financial Group, and we have a tremendous amount of experience working with applicants of all types. We have plenty of loan options available, and we can customize them to meet your needs. We understand that everyone is in a different position, and we can help you find the right financial vehicle to make your real estate aspirations come true. Contact us today to speak to a member of our team, and ask us about what it takes to get the application process going. We look forward to working with you.
