Hard money loans are excellent financing options for real estate investors who are flipping or building a property. Speed, flexibility, and security are most of what makes hard money loans so appealing.
If you’ve heard of hard money loans, and the benefits they offer to real estate investors, but you’ve never used one before, you might be wondering where to start. A hard money loan, after all, doesn’t work quite like a traditional mortgage.
What is a hard money loan?
Hard money is a loan financing option provided by private lenders and backed by assets—usually the real estate in question—rather than the borrower’s credit. Because hard money lenders are private investors, they have more control over terms and approvals. That’s why hard money loans tend to be faster, more flexible, and more available to some borrowers.
1. Save up a down payment (plus fees).
The down payment on a hard money loan is larger than the down payment on a traditional mortgage, because the loan is only backed by the property in question. The down payment on a hard money loan will be the difference between the purchase price plus budget, and 70% of the ARV.
For example, assume an investor is purchasing a property for $200,000, has a $50,000 budget, and expects an after repair value (ARV) of $300,000. The down payment would be 70% ARV – Purchase – Budget:
($300,000 x 70%) – $210,000 – $50,000 = $40,000 down payment
Keep in mind that you’ll also have to cover property insurance, closing costs, fees, and underwriting expenses. Make sure you have the capital to cover these expenses as well.
2. Set up an LLC.
Investing in, and flipping, real estate is a tricky business. Few projects go exactly according to plan, but unforeseen difficulties—especially in real estate, on a short-term loan—can get very complicated, very fast. Setting up an S-corp or an LLC for your real estate investing is an easy way to protect your personal assets and limit your risk.
In fact, most hard money lenders will only lend to corporations and LLCs. Hard money lenders do not issue consumer loans, so working with an LLC ensures that the loan is a business transaction.
Don’t let this step scare you. Setting up an LLC in Texas is pretty simple, and it will only cost you about $300.
3. Find a reputable, local hard money lender.
All hard money lenders are not created equal. Remember, these lenders are not banks or other heavily regulated financial institutions—they’re private individuals and businesses. As you compare hard money lenders, there are a few key factors to consider:
- Reputation — Does the lender have a good reputation with other builders and flippers in the area?
- Locale — The best hard money lenders are local. Learn why →
- Speed — How fast can your lender finalize approval? How fast can they get you the funds you need?
- Affordability — Hard money loans have higher interest rates than traditional loans, because of their much shorter loan terms, but you can still shop for competitive rates and fees.
4. Prepare proof of income.
Getting approved for a hard money loan requires much less paperwork than is necessary for securing a traditional loan, because the loan is not secured by your personal assets or credit. One of the few pieces of required paperwork, however, will be proof of income. Your lender will need to know that you can make the required monthly payments.
5. Prepare your repayment strategy.
Hard money loans are short-term investments—usually terms are about 12 months, but you might be able to get 24 months on some projects. That means you need an exit strategy prepared from the beginning.
The most common strategy is to sell the property within the loan period. Most hard money loans are for construction or fix-and-flip projects, and the investors simply sell the property at a profit once the work is complete.
If you don’t plan to sell the property quickly—or simply find that you can’t sell the property quickly—you’ll need to work on securing a more traditional, long-term loan to cover the cost.
If you’ve ever applied for a mortgage or other bank loan, you’ll probably be pleasantly surprised at how easy it is to apply for a hard money loan. There is little (or no) prequalifying involved, and many hard money lenders have a simple application available online.
If you’re in the State of Texas, and ready to get started on your real estate investment, you can apply for a hard money loan with Loan Ranger today.
7. Review the paperwork with an attorney.
Because hard money lenders are private organizations and individuals, you may want to have an experienced attorney review the paperwork for your loan, once you’re approved. Items to look for include:
- Are all fees disclosed?
- Is the repayment schedule included?
- Does it clarify how much of the payment is applied to interest?
How to Get a Hard Money Loan in Texas
Securing a hard money loan for your next fix-and-flip or construction project is much different than applying for a traditional mortgage, but it’s not difficult. The requirements are straightforward, and any hard money lender will be happy to provide details.
If your real estate investment is in Texas, we’d be happy to learn about your project and explore how Loan Ranger might be able to help. You can view details of our fix and flip loans as well as our hard money construction loans.
And wherever you live and work, if you’re just getting started in real estate investments, remember that your first step is to save up that down payment. Once that’s in hand, you’re ready to get to work!