5 Tips on Using Hard Money Loans for Real Estate Investment

Investing in real estate can be an efficient way to build your portfolio and earn money. You can invest in property, but you might not have the funds to buy it upfront. You'll want to consider using a hard money loan in those cases.

Hard money loans arit usually short-term, making them great for real estate developers and house-flippers. There are five tips you'll want to know about before you take out a hard money loan in real estate. Keep reading to learn more!

1. Know When the Property Becomes Profitable

First, you'll need to know exactly when the property will become profitable. If you encounter any setbacks, like issues that need repairs you weren't aware of, you'll want to ensure you can get an extension from the hard money lender.

You must repay the hard money loan as soon as you can. Otherwise, you're sure to accrue large fees from the higher interest rates. So, before you even take out a loan with a hard money lender, Pine Financial Group in Colorado, or someone closer to you, you need to study the real estate market to determine when the property will be profitable.

That way, you can avoid paying a large sum of the investment on gathered interest. It's worth noting that you'll always need to be fast at selling the property when it comes to hard money loans- the longer you take to pay the loan back, the more you have to pay on the loan in interest.

For house flipping, you don't want to hold the property for little more than a few months. A good strategy is to predict a five-year plan, then sell when the market's on an upswing. However, you'll want to hold on to the house for as little time as possible after having it fixed and ready to sell.

2. Always Ask the Lender Questions

It's also important that you always ask the lender questions. You'll want to reach out to them if you don't understand something. Even if you have previous experience with these loans, all lenders have different contracts and agreements.

You'll need to ensure that you fully understand the terms and conditions of the loan. Here are some examples of questions you can ask the lender:

What is the maximum amount you offer for a loan?
How does the loan repayment work?
Do you only finance specific types of properties?
Do you only make loans for homes in certain areas?
Do you provide any support to borrowers?

Knowing the answers to these lending questions will help you determine whether or not a lender is for you. You might want to talk with a few hard lenders and ask questions before choosing a particular one.

In short, never hesitate to ask the lender questions. They should be happy to help you better understand the terms of your loan. They probably aren't a good choice for you if they aren't.

3. Understand What the Lender Expects of You

You'll also need to study the contract once you have it. You need to know the exact terms. Hard money loans usually come from private lenders such as Patch Lending, so the terms are drastically different. Start by understanding hard money lending, then carefully comb through your contract.

Each contact has different pros and cons too. You'll need to read it thoroughly before signing and ensure you understand exactly what the lender expects of you. You should also know what to expect from the lender.

Generally, you can expect the term to be about 12 months. Still, many hard lenders also offer extensions for up to five years. The loan isn't very long because the lender expects you to sell the property relatively quickly. You'll need to know that you can turn a profit in that time frame.

No matter what you're signing, you always want to ensure you understand the entire contract. You should never sign off on something that doesn't make sense to you.

4. Consider Using an Attorney

Next, it's a good idea to consider reviewing the paperwork for the loan with an attorney before you agree to the terms. Since most hard lenders are private groups or people, you'll want to have an experienced professional look over the terms.

The lawyer will look for important details that you might miss. They'll also ensure that they let you know about hidden fees and how much of your payment goes to interest, according to the contract.

Talking with a local attorney is always best- they understand your area's unique laws and regulations. You'll have the best results with them.

Overall, attorneys have more experience with these types of contracts. They'll review it, then break it down and explain it. Otherwise, you might miss hidden terms in the contract.

5. Know What Down Payment You Need

You'll also need to know what you need to get approved for the loan. First, you'll need to save up for a down payment- and many other fees. The down payment should include the difference between the purchase price plus the budget and 70% of the ARV (after repair value).

You can calculate it like this:

70% ARV - Purchase Price - Budget

So, if you want to buy a property for $100,000 and have a $25,000 budget with an ARV of $200,000, you would figure out the down payment using this formula:

($200,000 x 70%) - $100,000 - $25,000 = $15,000 down payment

However, like any other down payment, the more money you can provide upfront, the better. You'll have access to better loan terms and won't have to pay as much money back in interest over time. So, make sure to save up as much as you can!