WHAT IS HARD MONEY?
A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans because of the higher risk and shorter duration of the loan. Most hard money loans are used for projects lasting from a few months to a few years. Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as cost to the borrowers. The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring.
WHAT ARE THE RATES?
Some Hard Money lenders request credit just like a bank and the same full documentation a Bank. Some just loan toward the cash flow of a businesses or the value of an asset (REAL PROPERTY INSTITUTIONAL LENDING) about 1% of them. The other 99% charges 9-15% interests and 2 to 5 points. (TRUE HARD MONEY)
WHAT ARE THE STEPS TO A FIX AND FLIP PROJECT?
- Overcome your fear of failure. The number one reason why most people don't get into flipping houses is because of fear. Sure, fear of losing money, fear of failure, fear of the unknown, fear of disappointing others, and fear of change are all very real to most people. This is the cause of many who could be successful in flipping houses to not even try it at all. The most important thing to do to conquer fear is if you want to get into house flipping is to not quit your day job until you at least have a year of experience under your belt. It's also important to have at least one year's worth of salary as a fallback. These sorts of safeguards will reduce the amount of risk involved and may minimize fear when starting to flip houses. Another great way to overcome fear is to start educating yourself and getting out and speaking to people that are currently doing it. Once you start realizing that these are people just like you, your fears will start to dissipate. You can then take the next step to achieving your goals. By realizing that it can in fact be done and your fears are either overblown or far less than you thought they would be, you can control fear and get on to flipping.
- Start networking. It's extremely important to get out and talk to people and network yourself. As mentioned in step number one, this an important part of overcoming fear. However, if you really want to get into fixing and flipping, the best way to do it is to go to local organizations and start speaking with people who are actually doing it. There are rehab patients, wholesalers, realtors, attorneys, lenders and real estate professionals who meet every single month in your local area. Getting to know these people and seeing how they are doing it, as well as making some initial contacts is an important second step in learning how to fix and flip. Some of the best kinds of meetings are the real estate investors in America meetings as well as chambers of commerce and business networking groups. Get out there and start networking!
- Start building your fix and flip team. This is an area where many people that are new to real estate investing are not so sure about. Fixing and flipping is not a solitary endeavor. Although the reality shows may make you think that it is, building a competent house flipping team is essential to your long-term success flipping houses. It's first absolutely essential that you first get a good real estate attorney. This attorney can also help you set up your business structure, whether it be an S Corp., a C Corp. or an LLC. You may want to ask some other real estate investors who they use for attorneys. These referrals will be excellent sources of potential legal assistance that you will need in your house flipping career. The same goes for certified public accountant, it's essential that you get a good one.also, you will need a good insurance agent. If you already have one, then this is a good start. Also, many of these real estate investor meetings start collecting business cards for contractors and builders. These individuals will be absolutely crucial to the "fixing part" of your house flips. Lastly, speak to as many real estate agents as you can - both buying and selling real estate brokers. These individuals will be a great source of new deals for you in the future.
- Start locating property. Your real estate agent on your house flipping team is likely the best resource for you to locate good property deals, but you need to be careful. Real estate agents make money by buying and selling property - not by turning a profit on your house flips. It's extremely important to educate yourself and talk to them about your plan for buying properties and how you're going to fix and flip them. This is where relationships with your real estate agent are extremely important. You may even need to go through a couple of real estate agents part of finding a really good one to help you in a given geographic market. Once the real estate agent starts to trust you and you start to trust them, they may start giving you access to MLS listings. You can then do searches on comps and other properties that have sold in the area, as well as comb through all the for sale properties that they currently have. In most cases, the real estate agent will do all this for you, but depending on your relationship you can certainly get inside information on houses that might be coming to market. This will give you a huge leg up on the competition. Remember it's about relationship building, and doing this for the real estate agent is essential to getting an finding good house flip deals.
- Analyze the deal. One of the best ways to determine the value of a property is to compare it to other properties that have sold in that neighborhood that are similar to the property that you are thinking about buying. This is what is referred to as "comps". Your realtor can certainly help you with this and having that access to the MLS like we had mentioned in step four is extremely important. When you are looking at comps make sure that they are within the last six months, as this gives you a recent indicator of what other houses are selling for in your market. Anything farther back than that is less relevant to what you could potentially sell the house for. Once you have determined comps on the market, you can readily determine "After Repair Value" or "ARV" for short. This benchmark price is what you will use in your calculations to figure out whether or not you can make a profit. Oftentimes this number might be derived from square footage of the house or just simply using the comps in the neighborhood. It's very important to make sure that your ARV is realistic and not a fabrication. This is where many new real estate investors and house flippers go wrong. Make sure that you bring along your contractor when you go through the house and he will help you determine what your repair costs will be. This is why it's so important to get a good contractor on your team. Another metric that's used to determine what you pay for the property is the 70% rule, which is a rule that indicates that you should pay only 70% of the ARV in order for you to turn a profit. You then deduct your repair cost from that ARV. When using this rule, combined with ARV, you'll avoid the bad deals as much as you will be a will to lock in profits on the really good ones
- Make the offer. It stands to reason that you can't fix and flip a property unless you actually buy it. This is where fear really manifests itself. This is where the rubber meets the road and you need to overcome that fear and actually make an offer. If your ARV and your 70% rule add up, you have good intelligence coming from your real estate agent, and you have reasonable rehabilitation costs, pull the trigger. One of the biggest questions is how much you should offer on a piece of property. The bottom line is that if you never make an offer, you'll never own a property. So make lots of offers. There are many ways to go in this step, but most important thing is to keep it simple, start off slow and lean on the advice of your real estate team. If you stick to your 70% rule, and offer slightly less, perhaps 1 to 5% less, then you'll always stay out of trouble and avoid bad deals.
- Funding the deal. This is one of the stickier points of flipping houses and one we've referred to in previous wikis. Most people don't have the money to fully fund the purchase of the property. This is okay. The thing you need to remember is that "money is everywhere". Think abundance and not lack. If you've networked correctly, you will probably meet people that are looking to lend money. Some of these might be "hard money lenders" or they might be "private money lenders". You may have also met potential partners in these partners may include your general contractor as well. Look around for people in your neighborhood or people that you know that have money invested in the stock market or own businesses. Perhaps your doctor or your dentist, professionals that are looking for ways to earn additional money can be excellent lenders for you on your fix and flip deals. These can be friends, coworkers, relatives, family, or even other real estate investors. In fact, some of the most successful real estate investors funded their first deal from money from family. Some people say family and business don't mix. It's a great way to get yourself started and give your family a decent return on their money that otherwise might be sitting in a CD, a bond or decreasing in value in the stock market. Keep your eyes open for any sort of funding opportunities that may present themselves. Keep on the lookout at your network meetings as well - as these are some of the best places to meet potential investors.
- Manage the rehab process. Just like when you bought the property using a formula to control your purchase, controlling your rehab costs is just as important. Using general contractors is a great way to manage the rehab if you can afford them. In some markets, the cost of a general contractor is cost prohibitive. In which case you may need to manage the rehab yourself or hire a project manager to do it for you. Using a budget repair form is a great way to keep track of the repairs needed. See you can look at it and refer to it in a snapshot. Use it to get estimates from subcontractors like plumbers, electricians and painters and check back to it often. Make sure you set up a time line for completion as well. If you're managing the project yourself, do everything you can to keep people on track and on budget. There will be surprises, no doubt – but make sure that you are rigorous in your management of all aspects of the project or that your contractor or project manager is on top of each and every detail depending on the scope of work, your rehab project should last between 3 to 6 months. The carrying costs that are associated with holding a property for this long must be factored into all your math and all your equations as well. However, there may be cases where you're just replacing the floor or doing some minor painting work. In cases like these, the rehab work is fairly simple and the time limit is short. No matter which way you go, make sure you tightly manage your subcontractors and keep everything on schedule. Account for cost overruns in your mouth as well. Your contractor should be old to give you an idea as to worst-case scenarios which you can factor into your analysis.
- Sell your property. You've worked hard and now it's time to realize the profits.. This is where all your hard work really pays off. There are many ways to sell a property and we will touch on each one of those ways here. My personal opinion is that a real estate broker is the best way to go when selling your property. Make sure that you factored in their commission upwards of 5% in order to make sure that you lock in your profits. You can also do some of the marketing yourself and do a for sale by owner. This involves a lot of marketing and a lot of time on your part – so it all depends on how much time you have to devote to marketing and selling your flip. When you list the property, list it between 1 and 5% over your ARV. Make sure you don't overprice it for the market. Your real estate agent will tell you in the time that you have been doing your rehab whether the market has turned upwards or downwards. Take the advice of your real estate agent and listed for what he or she says. Remember, the longer you hold the property, the less your profits. Your soft costs including finance charges, real estate taxes, utilities and insurance start to add up in eating away your profits, the longer you hold the house. Lean heavily on your real estate agent for market advice here. Refer back to building your house flipping team in step #3.
- ARV Reminder: We talked a bit about ARV (or after repair value) to determine what you can sell the property for when you've completed it. It's really important to revisit this again with your real estate agent when you sell and determine if that old ARV is current or if you might need to adjust it up or down. Have them perform a new market analysis - not relying on the earlier one as market conditions may have changed. Your geographic area and economic conditions may have changed in the period of time which you are doing a house flip. Don't overprice your flip. Price it according to the market and sell it quickly.
- Pay Your Contractors On Time: When working with contractors, nothing de-motivates them more than not being paid on time. Your contractor or your project manager is the one that keeps your flip going and on schedule. So treat them right. Stop by occasionally and bring them coffee or maybe even bring them a case of beer at the close of business on a Friday. It's little things like this that go a long way. Keep them motivated while keeping you on track to lock in profits.
- Beware of Eraser Math: When you are doing your numbers, and your numbers don't seem to quite work, don't use the "eraser method" to change your numbers in order to make your numbers "work". This is one of the biggest mistakes new real estate investors often make. Stick to the numbers, stick to the 70% rule, don't overpay for the property and set realistic ARVs for all your flips.
- Don't Get Emotionally Involved: The numbers should dictate whether or not you buy a house or not. Don't "fall in love" with a property because of a number of reasons. Be calm, cool and methodical when you make your purchases. Be careful with the first offer that comes in as it may not be the best Negotiate if the price you feel is too low or it doesn't suit your ARV. Oftentimes if you price the property accordingly, you'll sell it fast and you lock in your profits. But this is provided that you didn't get emotional in your assessment of the property to begin with.