Austin, TX (PRWEB) February 19, 2014
A recently published MarketView report shows that last year, 66.2 million square feet of new industrial construction was built out in the U.S., making 2013 the strongest year for new industrial construction since 2009.
Despite the strong uptick in activity, many real estate investors are still struggling to secure construction loans to fund their development projects, and many have turned to alternative finance sources such as hard money lenders.
A hard money loan can be a vital tool for real estate investors looking to maximize their profits, complete more investment projects and minimize the amount of capital needed to accomplish their investment goals.
Seasoned real estate investors know that using a hard money lender is the faster and easier way to fund a real estate investment project when compared to relying on traditional financiers like banks; and asset-based hard money lenders are much more likely than banks to fund real estate construction projects and fix & flip projects, because bank regulators see construction loans as too risky for their heavily regulated portfolios.
Most hard money lenders make loans at interest rates around 12% and charge anywhere from 3 – 6 points. These higher interest rates often make less experienced investors gun-shy, but the reality is, in a spec home or fix & flip scenario, a short term hard money loan at 12% or even 13% can generate much more profit for the principal investor than an equity partnership in most cases.
Investing in real estate is an art, and there are many tips, tricks and strategies that successful investors employ to get their deals done and cash flowing.
Here are some essentials of investing with a hard money loan:
1. If you want a fast close, you need plans
This happens all the time: An inexperienced investor puts a property under contract to close in 2 weeks. The investor contacts a hard money lender to fund the project knowing that, next to cash, hard money is that fastest way to close a deal, BUT the investor has no plans, no specs and no budget.
Lesson: Without plans, an appraisal can’t be ordered, or even a BPO (Broker Price Opinion). Without an appraisal or BPO, the lender can’t verify the ARV (After Repaired Value) of the project. Without an accurate ARV, the lender can’t make the loan.
2. Don’t lie
It’s common for borrowers to try to make themselves look “more qualified” for a loan than they may actually be – but what borrowers should realize is that hard money lenders are much more concerned with the value of the asset than they are with your personal financial history. Most hard money lenders don’t even check credit scores. However, if you fail to submit the financial information the lender asks for, just because it’s not as pristine as you think it should be, it looks like you are going out of your way to hide something from the lender, which reflects worse on you than subpar financials.
Lesson: The lender wants to make your loan! Be helpful and transparent so that the lender can work with you to resolve any questions in your financial history. Don’t sabotage yourself by lying.
3. Expect to have “skin in the game”
Many hard money lenders market their loans as having the potential to fund an investment at 100% LTC (Loan-To-Cost), meaning a borrower won’t have to put a dime into the project. Although there are some scenarios where this is true, it’s very rare, especially in hot markets like Austin, Houston or Dallas-Fort Worth, where the acquisition of quality investment properties is über competitive.
Lesson: When using a hard money loan, you won’t need to sink a ton of cash into the deal, but be prepared to put some skin in the game for plans, engineering, an appraisal, an underwriting /loan commitment fee and, more than likely, lender points to close the loan.
4. Do your project through an LLC
Limited liability companies, (LLCs) protect their owners and members from liabilities that present themselves during a real estate investment, and have an ideal structure for income tax purposes. LLC owners are only liable for debts of the LLC up to the amount of the member’s investment in the LLC. So if an investor starts an LLC with a $20,000 investment, and the LLC assumes a debt of $200,000 to do fund a real estate project, the LLC’s owner is only liable for $20,000 of the LLC’s obligations. LLCs also subject their members to only one level of income tax on the profits and gains of its ventures. As “pass-through entities” an LLC is not itself subject to income tax – only the members are taxed on the profits and gains from the LLC, based on percentage ownership.
Lesson: Doing business through an LLC limits personal financial liability, and avoids the risk of double taxation on profits and gains.
In the real estate investment world, timing is everything. When the iron is hot, investors need to have the ability to strike and strike fast. With the right preparation, a hard money lender can close a loan in 2 weeks or less, and by following the aforementioned tips, you’ll minimize your time waiting for funding and maximize your profit potential.
Provided by Pride of Austin Capital Partners