Conventional Financing vs Hard Money Loans – A Winning Strategy

This month, we’re discussing “The Winning Strategy” and how many of our Real Estate Associates and Financial Specialists’ clients go about successfully securing rental properties and then “cashing out” to provide funds for the next piece of investment property.

Hard money loans still require a 20% down payment in addition to closing costs and financing fees, but the difference is this –

The hard-money lenders are more often willing to take on the risk of a fixer-upper rental property when conventional banks are not. Because the hard money lenders are taking on a larger risk than those of conventional banks, the interest rates are much higher – but not for long!

Here is the winning strategy outlined for simplicity:

1. Secure the hard money loan and your investment property.
2. Immediately begin renovation. A company such as ours can provide an in-house construction crew capable of rehabbing your home and having it ready for tenants within just a couple of months. We do this work at rates that are typically 30% lower than the average contractor would charge, and have years upon years of experience with renovations in relation to ROI.
3. Secure your lease and tenant.
4. Refinance with a conventional loan product (much lower interest rates). Now, when you present your property to the bank, it’s much more desirable. It’s fixed up and it’s an income property. The bank that would have walked away from you in the initial investment phase is now looking at an attractive piece of income generating property.
5. Cash out. With a cash out refinance you can take out a lump sum of equity to pay off the higher interest debt from the original hard money loan, or put funds toward the down payment of a new investment property. An investor who uses this financing is getting back their down payment plus any equity that the property has gained since they purchased it, minus what ever amount spent on repairs. (The expectation here is that the cost of repairs are a smaller percentage of what the appraised value of said repairs actually are.)

What exactly are the terms and conditions of a hard money loan?

• Up to 80% Loan-To-Value
• Rates from 13-14% interest
• 5 percentage points for origination fee
• 2-20 year terms interest only balloon loans
• Need a U.S. corporate entity (LLC, LP, ect…) if outside Florida
• No credit needed
• Able to fund a deal in 2 weeks max.

With the high interest rates of a hard money loan, it’s especially important to utilize the “winning strategy,” which significantly limits the amount of interest paid on the original loan. This process moves very quickly and for new investors particularly, securing a hard money loan in the first place can be a difficult task. Someone with lots of time and experience in the business likely has established networks and valuable contacts, whereas new investors are just getting their feet wet.

This is why a partnership with our Real Estate Associates and Financial Specialists is most beneficial to new investors. We take complicated situations and make them simple for the client. We have established relationships with several hard money lenders and “stick with you” throughout the entire investment process.

Want to learn more about the winning strategy? Contact us by simply filling out the Investor Profile Sheet.