Real Estate Investing: No Longer Just for the Wealthy, Consider Hard Money Lenders
Real estate investing is on the rise and with it the need for hard money lending. Middle-class entrepreneurs are finding opportunities to boost their income by investing in fix and flip (or fix and hold) real estate investments at an exciting rate.
What exactly is a flip?
Thanks to the success of several primetime television shows and the rebound of the US housing market, house flipping is on the rise. These savvy investors find distressed properties and purchase them at a discount. On average they are purchased at 26% below market value. The end goal is the renovation of the property and selling it for a profit or holding it for rental income.
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Smaller investors are making money…
According to RealtyTrac’s 2015 US Home Flipping Report, residential property flipping is the most popular it has been since 2007. Currently, there are over 110,000 active flippers. Out of those 110,000 flippers last year, the average number of flips per investor was just 1.6. The lowest it has been in 8 years. This is a strong indicator that smaller investors are entering the market.
Residential property flipping is the most popular it has been since 2007. Click To Tweet Why the rise in new real estate investors? Quite simply, they are making money. According to the research, the average finished flip appraised at 5% above market value. And, it sold for an average gross profit of $55,000 if it wasn’t held long term for rental income.
But where do they get their money?
Really, the name of the game here is leverage. By bringing in a lender or equity partner, investors are able to fund these investments with just a fraction of the cash coming out of their own pockets.
The first source of funding beginner investors try is their local neighborhood bank. Banks tend to offer lower interest rates than the alternatives. Some investors feel more comfortable using a federal institution. However, investors that are not exceptionally healthy with an outstanding profile have trouble getting the financing they need from banks for a few reasons.
First of all, regular bank or credit union financing is almost impossible to obtain with a mediocre credit score and if you have limited cash on hand. Secondly, and perhaps even more importantly, bank loans take time that investors usually do not have. Time is money when it comes to real estate investing. Hence, a delay in funding almost always means the inability to snatch up that perfect listing and a missed opportunity.
Hard Money Lenders
The option many investors turn to for leverage is hard money lending (or asset based lending). Essentially, a hard money lender is willing to finance “riskier” loans for borrowers that don’t meet institutional criteria in exchange for higher interest rates.
As opposed to banks, hard money lenders are more interested in the deal itself rather than the profile of the borrower. These alternative lenders use different underwriting criteria. They tend to offer significant leniency when it comes to credit scores, income history, and other traditional underwriting factors.
Hard money lenders want to know that you’re getting involved in an investment that will be profitable. Whether the goal is to sell quickly or hold and rent, they want to understand the objective. Unlike conventional financing, these alternative lending firms were borne out of necessity. As a result, their processes are designed to support those specific needs.
Real Estate Investing: No Longer Just for the Wealthy Click To Tweet
Hard Money Lenders Help with Leverage
Finally, in addition to closing loans fast, hard money lenders help investors leverage their capital by financing some or all of the purchase price of a property. And often they help with the renovation costs as well. As a hard money lender ourselves, we typically fund up to 80% of the purchase price and all of the rehab costs. This means in exchange for paying more money per month in interest, a borrower is able to buy real estate. And, with just 20% of the purchase price coming out of their pocket. Investors looking to hold a property for rental income typically refinance out of the hard money loan with conventional financing once the property has been stabilized.
1. New investors are entering the real estate market at the highest rate in a decade.
2. The average fix and flip or fix and hold project is purchased at a steep discount. Ultimately, it’s worth several percentage points above market value.
3. Finally, individual investors that are not independently wealthy can leverage alternative financing to fund investments with just a fraction of the deal out of pocket.
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