4 Tips That Can Help Beginners When Investing
September 12, 2013
Real-estate investment has helped many people become millionaire.
I have never understood why people jump in head first to a business venture and
begin investing their money with the hope that they can become successful in
the real-estate industry without doing there homework. So it does not surprise me
that many would be real estate moguls get in over their heads, and end up
failing. These are 4 key tips that can help investors when investing make in
this market and how to help them succeed...
1. Using Your Property Has Leverage
The key to instant gratification is to own property free and clear to
Learning real estate is
an expensive proposition. People tend to finance their properties paying
interest that cuts into your profit margin.
The value of having a free and clear property gives you leverage
to purchase other properties free and clear and create residual income. Paying
cash eliminates the interest, but even then, there are property holding costs,
such as taxes and utilities. Renovation costs must also be factored in. When
you fix the house up and lease it, it will take months before you begin recouping
your initial investment, but once you do that property can easily create a
income that pays for itself.
2. Delegate Your Time
Renovating a home or apartment complex that you bought (as is)
can be expensive and a time consuming business venture. Let’s face it with a
smart investment you can make money from this business venture. Although the
truth is it can take months to find and buy the right property. Once you own
the house, you'll need to invest time to fix it up. Before you can lease it,
you'll need to schedule inspections to make sure the property complies with
applicable building codes. If it doesn't, you need to spend more time and money
to bring it up to par. Next, where many people make their biggest mistake they
try to do it all! Look there is so many hours in a day and you can only do what
you can do. What you should do is research and locate a property management
team that can take that stress off you. A good Property Management team responsibility
is to lease, maintain and evict. Remember there are only so many hours in a day
and if you spread yourself to thin, you will fall by the way side. Please make
this mental note to yourself, if it does not make sense you will never make a
3. Know Your Limitations
The real money in investing in (as-is) properties comes from sweat equity.
If you're handy with a hammer, enjoy laying carpet, can hang drywall, roof a
house and install a kitchen sink, you've got the skills to renovate your
investment and make money. On the other hand, if you have no skills, that’s okay.
You have to know your limitation, if you have no skills as a carpenter, find
someone who does and let them do the work for you. Always remember that there
is strength in numbers. What makes a chain strong is not the single link, but
4. Crawl Before You can Walk
As a first time investor you are going to make mistakes. Rome was not built
in a day so don’t think that you are going to be the mogul phenomenon in the
industry. Everyone has to learn to crawl before they can walk, and you will be
no different. Take mental notes of what you did, as a matter of fact push it to
the next level by documenting what you did and why you did it. The key in this industry
is gain value from other peoples mistakes, read! To be successful in this
business you have to be able to pick the right property, in the right location,
at the right price. In a neighborhood of $100,000 homes, do you really expect
to buy at $60,000 and sell at $200,000? The market is far too efficient for
that to occur on a frequent basis. What could happen is you could buy a duplex
for $60,000 and lease both units at $1000 dollars a month. You now have created
a passive income of $2, 000 a month which is $24, 000 dollars a year.
When you are ready to get involved in investing in properties, do your
research! Like any other business venture, investing in properties is a science
and requires time, money, patience, skill, and it will definitely wind up being
more difficult than you ever imagined. Once you get it and I know you
will, you will start seeing the money roll in. I have one client that has 8
Duplex that are free and clear, and he makes $12, 000 a month. The bottom line
is that once you figure out what to do and how to do it, your ability to earn
an income will be unlimited!
When Easy Money is Hard to Come By, Hard Money is an Easy Call
Most investors are at least passingly familiar with conventional
mortgage underwriting. We’re quite used to thinking about mortgages and
mortgage underwriting in terms of cash flow. Banks are chiefly concerned
with the stability of the borrower’s income and whether that income –
plus an allowance of, say, 60 to 75 percent of anticipated rental income – will be steady enough and sufficient enough to keep up the payments on the property.
these lenders, your credit history is an imperfect but reliable
indicator of the probability that you will default on the loan. Yes,
people with high credit scores sometimes flop, and loans to people with
poor credit scores often perform beautifully for the lender. But the
correlation of credit history,
reflected in your FICO score, and mortgage performance is strong enough
that lenders continue to rely on it. Think of it: If the correlation
between FICO scores and mortgage defaults began to weaken, FICO would
start changing its algorithm so that it would still be a reliable tool
for lenders. It’s not the only tool, by a long shot. But your FICO
score, together with your income and employment history, is still a huge
part of your ability to qualify for any mortgage.
That’s tough on people with unconventional professional histories,
the self-employed (that includes any full-time, professional flipper or
real estate agent!), and people with spotty credit. But fortunately,
there’s more than one way to finance an investment property – especially
a short-term investment.
That’s where so-called hard money lenders come in.
A hard money lender is a lender who specializes in loans to people or
on properties which don’t fit into standard assumptions that
traditional lenders use. These loans are generally shorter-term loans,
which can be for anything from a few weeks to a few years, and they are
geared toward fix-and-flip situations. Interest rates are typically
higher than what your local bank charges for 15- or 30-year mortgages.
But since flippers are typically in and out of a property in a few weeks
or months, the interest rate on any particular deal is a relatively
The underwriting, however, is fundamentally different from bank
underwriting. Bank underwriting is based primarily on cash flow
analysis. But cash flow means little to the hard-money lender. Instead,
the hard money lender relies on asset-based underwriting.
This form of underwriting is much friendlier to the investor with a
spotty credit history or an irregular income. Normally, the hard money
lender doesn’t even care what your income or credit history is, as long
as he is comfortable with your personal integrity. Instead, the lender
is looking for security in the asset. Collateral is king.
Hard Money LTVs
Hard money lenders are generally looking to provide about 2-1
financing on any given project. That translates roughly into LTVs of 65
percent or less, though some lenders may go up as high as 75 percent. In
many cases, hard-money lenders are open to cross-collateralization
arrangements. That is, you can pledge a property or other asset that is not
financed by the deal as collateral. 100 percent financed deals are
possible if the collateral is there. These 100 percent financed deals
are not unheard of in the hard money world, where there is substantial
For example: An investor owns four houses. He lives in one. He wants
to buy another house for $200,000, but doesn’t have the cash for a 35
percent down payment. But by pledging the house he plans to buy, plus
his equity in another one of his investment properties, he can finance
the entire purchase and then some for the repair.
However, you can’t cross-collateralize an asset you hold in a
retirement account for any loan outside of your retirement account.
Are They Loan Sharks?
No. Not by a long shot. Typically, hard money lenders are just
investors, or bird-dogs acting for investors. They have to be licensed,
and they don’t want to lose that license. The investors themselves are
typically successful businesspeople looking to diversify their own
(substantial) investment portfolio against low yields on savings and
treasury bonds on one hand, and an uncertain stock market on the other,
who are looking to get a decent rate of return on their capital. Hedge funds
often allocate a portion of their capital to hard money lenders,
because they can get a 6 to 8 percent return or better on their capital
even in today’s environment of low interest rates, with some safety of
capital thanks to the collateral.
You can expect a hard money lender to be very experienced in your
niche – most hard money lenders specialize in specific kinds of loans,
or loans within a certain geographical area. They will be very
knowledgeable about conditions in your market – and a valuable source of
market intelligence themselves.
Advantages of Hard Money
Hard money loans are fast. Because they don’t need as much due
diligence on non-property-related issues, they can be approved and
funded quickly – often within a week. An experienced lender will know
what a property is worth, and can make a quick decision based on the
estimated after-repair value of the property by itself.
Hard money lenders don’t need to conform to anyone else’s
underwriting standards. Fannie, Freddie and the VA aren’t involved. The
hard money lender is primarily interested in the safety of his capital.
Demonstrate to the lender that his capital is more than secured by the
collateral, and you’ll get the loan.
The hard money lender isn’t very interested in your tax returns, your
income or anything else. If he knows the loan is secured by adequate
collateral, all that other nonsense is irrelevant.
Less Red Tape
The hard money lender lends on the asset – not on your income and
credit history. Because of that, the documentation is much less involved
than your typical bank mortgage. If you’re a serious flipper, your time
is money. Hours spent applying for bank loans are better spent finding
good properties, overseeing process has value in and of itself.
More Suitable Terms
Yes, you’ll typically pay higher interest rates. You’ll also have
more points or up-front fees for hard money loans. But many hard money
loans have no payments for the first 90 days, 6 months, or even the
first year. Instead, there may be a balloon payment due at the end of
the loan term. This can be ideal for the short-term flipper, since you
don’t want to be making mortgage payments on the loan while you’re busy
trying to fix it and you can’t rent it. It may be worth it to trade a
higher interest rate for improved cash flow when you are at your most
vulnerable – during the repair and renovation process.
Yes, hard money lenders typically only lend 65 to 75 percent of the
LTV. But they calculate the value based on the after-improvement resale
value of the property. That’s a lot different from conventional mortgage
underwriting. Banks usually lend based on the as-is value of the
property. This means that in some circumstances, you may actually be
able to borrow more money from a hard money lender than from a bank.
Imagine a $100,000 property in need of substantial renovations. You
can make a convincing case to a hard money lender that you can add at
least $35,000 in value with a $35,000 improvement. The hard money lender
may say yes, and lend you up to $87,750, or 65 percent of $135,000. The
bank might balk at lending at $87.75 percent of value on an investment
property when the owner isn’t occupying. But a hard money lender might
give you the green light.
Experience With Exit Plans
A good hard money lender can help walk you through an exit plan for
your property as well. Although the underwriting is asset based, the
hard money lender does not want to foreclose on the property. Why?
Because of the value proposition they bring to their own investors. When
a businessman or hedge fund manager gives money to a hard money lender
to lend out, they are doing it for income. If a loan defaults, the
income stops – and the hard money lender has to answer a lot of
uncomfortable questions from his backers about when they’ll get their
That’s not what the hard money lender wants. They just want you to
successfully complete your flip so you can sell – and then come back to
them for the next deal.
What to Watch For
Pay close attention to prepayment terms. Lenders don’t want capital
sitting idle between loans. If they take a risk on you, they want their
capital to be at work for a while. Many hard money loans contain a
prepayment penalty of some sort, or require you to prepay a certain
amount of interest.
Private lenders typically charge a few points more for their deals
than you would pay for conventional mortgages. It’s quite common for
borrowers to pay 4 to 10 percent of the loan in closing costs, rather
than the zero to 3 points common in bank financing. Every deal is
different, and every lender is free to negotiate his own terms.
Hard money lending doesn’t make sense for every deal. If you have a
great relationship with your bank, strong credit, and all your
documentation ducks in a row, it’s nice to be able to get those good,
cheap interest rates available now, and the lower fees of conventional
financing. If you flip a lot of properties, those higher closing fees in
the hard money world add up – and pretty soon you’re out a whole down
payment in closing fees you’ve paid to lenders. There’s certainly value
in bank loans on favorable terms.
It’s best to have an open mind, and cultivate relationships both with private hard money lenders and with conventional lenders.
spot a house that you would like to rehab or flip and decide make an
offer. You plan on financing through a hard money lender, but haven’t
yet done this kind of deal, and wonder what happens after you’ve got the
house under contract. Here’s a brief look at the process:
All hard money lenders have different requirements. Some
will loan a percentage based on appraised value, while others will loan
a percentage based on the purchase price. It is better to find the
lenders that will loan on appraised value. The lender will give you a
breakdown of your fees along with their terms, including:
- Loan Points
- Closing Costs (Escrow Fees, Document Fees, Notary Fees)
- Interest Amount
A typical lender might say:
will loan 60% of ARV (appraised repaired value), with 5 points, 500 in
document fees and a 6 month interest only balloon payment loan at 10%.
To translate on a deal that appraises at $200,000:
will loan you up to 60% ($120,000). To get the loan you will pay $6,000
in points + $500 in document fees, and you will pay $1,167.67 on the
loan, until you sell the property or until 6 months is up. They will
take a trust deed and make you sign the other documents like on a
you present a property, you should get familiar with local lenders and
pre-qualify with them. Their lending requirements are often-times
different than that of a traditional mortgage lender. Hard money lenders
are usually most worried about the amount of cash you have, your level
of experience, the specific deal and your credit.
Here’s the typical hard money lending process:
Step 1 – Pre-qualify: talk to the lender and see what they require of you and your deal.
Step 2 – Find and put a good deal under contract.
3 – Call the hard money lender and inform them of what your contract
price is, the estimated cost of the repairs, and what you think the ARV
value is. Here’s a good worksheet to help you out.
4 – The lender will either send their appraiser or give you an approved
list of appraisers, and you will then get the property appraised.
Step 5 – They may request some of the escrow documents to verify the paperwork.
Step 6 – They will agree or disagree to fund the loan and will tell you what amount and under what terms it will be.
7 – You close the loan — In many ways, its just like a conventional
loan in that you do the closing at a title company or lawyer’s office.
The lender puts the loan amount into escrow at the title company. The
buyer might have to put in money or might get money back, depending on
the deal. The title company issues checks as specified on the HUD;
typically, a big one to the seller and points back to the lender. If
there’s cash to the buyer, they would issue that check, too. The title
company will ensure that all the proper paperwork is completed in the
correct order and that funds are sent to the appropriate people.
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