Hard Money Financing – Your Perfect Investing Tool
No comments yetA lot of people would probably like to test their luck in real estate investing if only they have the capital. Well, they can now do so, thanks to hard money financing.
This funding allows real estate investors to proceed with projects with little or no capital at all. Unlike traditional lenders, hard money lenders can give you enough money to fund a whole project, including repairs. Much of this has to do with the way such loans are computed.
For example, you want to try rehabbing, which is buying a cheap property, repairing it to raise its value, and then selling it for a higher price. Lenders usually release around 60% to 70% of the ARV, or the after repair value, of the property for rehabbing loans. The ARV is the value of the property after all repairs have been completed. This amount is often enough to cover all expenses, including repairs.
Let’s say you will rehab a fixer upper worth $90,000. You plan to spend $15,000 to raise its ARV to $150,000. Your total expenses will be $105,000. This means you can flip the property using only hard money financing as your total expenses is covered by the 70% ARV, which is $105,000 as well. If you borrowed from banks and other traditional lenders, you are likely to get $90,000, or the purchasing price of the fixer upper home. You then would have to finance the repairs with your own money.
Problem is, what if you didn’t have enough money to fund the repairs? Will you just let an opportunity to make big money pass? Or will you use hard money financing to proceed with the project? Smart investors will know what to do.
Hard money financing is also perfect for those who have a poor credit score but stumbled upon a very good deal. If you have a bad credit report, chances are traditional lenders will turn down your loan application. The same could not be said of hard money lenders, who assess borrowers based on the deal they have in hand. Using the same example, you are likely to get funding if you present a plan that will raise a fixer upper home’s value from $90,000 to $150,000.