Navigating the real estate investment landscape can be a complex endeavor, especially when it comes to financing. In this comprehensive guide, we will shed light on two crucial aspects of the process: dealing with a hard money lender and purchasing properties from a real estate wholesaler.
What is Hard Money Lending?
Contrary to conventional bank lending, hard money lending is a faster, more flexible method of financing real estate investments. However, it does come with its own set of challenges and conditions.
A hard money lender is typically a private entity that offers loans at higher interest rates compared to conventional banks. The interest rate could range from 12% to 15%, significantly higher than the 7% you might pay for a bank loan.
Hard money lenders also often charge points at the end of the deal, which can further increase the cost of borrowing. These features make it a pricier, but often more accessible, alternative to traditional bank financing.
Moreover, with hard money lending, speed is of the essence. This type of lending is intended for quick turnarounds and is not suitable for long-term projects. If you opt for hard money lending, prepare to get everything done swiftly and efficiently.
Who Benefits from Hard Money Lending?
Generally, people who are new to the real estate industry find hard money lending beneficial. Banks can be stringent with their lending practices, making it hard for new entrants or those with an unconventional credit profile to secure a loan. Hard money lending can be a viable route for those who need to build up a real estate portfolio before they can qualify for traditional bank loans.
However, borrowers should be aware that hard money lenders protect their interests rigorously. If a borrower fails to complete a project or defaults on the loan, the lender has the right to take over the project and complete it themselves.
What is Traditional Bank Lending?
While hard money lending can be an appealing option due to its flexibility and speed, the lower interest rates and more standardized procedures of traditional bank lending make it a preferable choice for many.
What It Takes to Work with a Traditional Bank
Working with a traditional bank often requires a substantial amount of money in your account. Banks typically expect a 25% down payment and a robust business plan before they even consider approving your loan. Furthermore, they often set up an additional loan for repairs and renovations, with drawdowns made available as and when you need them.
Buying from a Real Estate Wholesaler: A Possible Solution
When you’ve exhausted your financing options or hit the limit with what banks are willing to lend, buying from a real estate wholesaler can present another option for securing property. Real estate wholesalers often offer properties at lower costs than the market value, which can help you stretch your financing further.
When to Consider a Hard Money Lender
While your profit margins might be lower with hard money lending due to the higher interest rates and points charged, it might be worth considering if the return on investment still makes sense. If you’re generating a substantial number of leads and the potential return on these properties is high, using a hard money lender can help you seize these opportunities.
Approaching a Hard Money Lender
When you decide to approach a hard money lender, make sure to be prepared. You should have a solid business plan and a network of contractors to demonstrate your competence in handling their money.
Remember, hard money lenders will be heavily involved in the project, often physically checking the progress of the renovation to ensure their money is being used as agreed.
The world of real estate investment can be complicated, but understanding these two elements – hard money lending and buying from a real estate wholesaler – can help you unlock new opportunities and grow your portfolio. Remember, it’s crucial to evaluate all your options carefully and make informed decisions that align with your financial capabilities and investment goals.
If you need more information or assistance, don’t hesitate to contact us. We’re here to help you make the best possible real estate investment decisions.