Many smaller real estate developers doing rehabilitation projects (“fix and flips”) use their own money for new projects. There is nothing wrong with that but it may be one of the reasons why so many developers remain small and can’t manage more than a couple of projects at a time. Getting loans opens more opportunities for real estate developers. However, when a developer tries to raise cash from friends and family, he or she may run into questions about his or her aspirations to break free from the nine-to-five rat race and achieve personal wealth goals. Friends and family members don’t know the real estate business and they may be afraid to risk their money. In addition, if a project goes south (which does happen in real estate), the developer may damage relationships with friends and family.
You can try getting loans from traditional banks, but they often have low-risk tolerances and are short-sighted.
You may find that borrowing money from a “hard money” professional real estate lender is much better on many different levels.
The real estate market is full of surprises, and cannot be predicted with 100% accuracy. The most experienced and successful businesspeople who become wealthy through real estate do not tie up all of their capital in just one or two projects.
In this Syberloans.com discussion, we will highlight some important advantages of using hard money loans, and how that can actually be better than using cash:
MORE DEALS. With a hard money loan, a developer can work on more deals than she or he can use her own cash or even a friend’s money. Putting only 20% of your money into each deal, instead of 100%, can be a game changer for many small developers. A hard money lender puts up the other 80% investment cost in your project, decreasing your risk factor substantially. And—this is important—in case of misfortune, you lose only your 20% loan deposit.
• LESS RISK. Use of the hard money loans reduces your risk factor not only by limiting your risk to 20% instead of 100% but by providing an extra pair of eyes to look over your proposed project. All hard money lenders, perform a thorough analysis of each potential project loan before clearing it to close. This can be very helpful, and even reassuring, for those just starting in real estate development or entering a new real estate market where they have not done business before.
•Typical interest rates for hard money loans vary between 8% and 15%, plus points. We have found that, if a developer can’t afford to pay that much for the use of our capital, the project may not be worth investing in at all. In other words, a good project should make 20% or more profit for the developer. If the developer tries to proceed with a profit margin of, say, 10%, he or she is taking a huge risk because a 10% profit does not provide enough reserve in case there is an additional unforeseen expense.
• PROFESSIONAL HELP. The borrower is assigned a specialist (often the lender’s staff member), who watches over him not only initially, but throughout the process helping the developer resolve problems when they arise, especially if there is a lot of construction involved. This service is included in the project interest rate and points charge. Since the hard money lender is 80% or more invested in your project, the lender wants your project to succeed!.
In fact, often, a hard money lender already knows a good deal about the potential of your proposed project in the area where you propose to build or rehabilitate. After all, hard money lenders focus on construction and renovation projects, and they know which loans were repaid easily and which encountered problems so your lender can be an invaluable resource for information.
EASY OFF-RAMP. Hard money lenders can be taken out of the project at any time. If your project exit strategy changes, whether voluntarily or out of necessity from a sale to rent, you are free to pay off your hard money loan with an institutional loan from a bank with lower interest.
- Splendid profits with hard money loans
Typical hard money rates vary between 8% and 15% plus the points. For most projects, if a developer cannot afford to pay that amount for the use of capital, the project may not be worth going for. In other words, a good project is the one that makes 20% or more for the developer. If the hard money calculation does not work and the developer decides to use cash hoping to earn 10%, that project may turn out to be a losing one because 10% does not provide enough cushion in case of a problem.
HIGHER PROFITS. With hard money, the developer can invest in more projects at the same time, offering, a higher average probability of success through a diverse portfolio of projects. A 15% to 40% rate of return on each project, is often achieved on rehabilitation projects. Of course, some projects produce profits while others may result in losses, so a savvy developer is seeking a high average rate of return.
AND, EASIER PROFITS. After you’ve done your research, Syberloans.com can make the next step easy!
Once you have found a project you want to work on, it’s easy to apply for a hard money loan. And, an application is risk-free! Even if you end up not accepting the loan, the information you receive from a good hard money lender will help you better prepare for your next project. Syberloans.com makes it easy to reach out to a variety of hard money lenders in your area to find one or more interested in your project. Then the Syberloans.com platform speeds the loan process to enable you to get a hard money loan as soon as possible after you select a project property.
