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Hard money loans are specifically developed to accommodate the needs of investors who buy and rehab residential and commercial properties. Tapping the services of a hard money lender presents a fantastic alternative to using your own cash. Hard money lending democratizes real estate investing. However, to see your business flourish, you need to follow these steps to success.
Here are the steps
Select the Right Hard Money Lender
The right hard money lender is a crucial component of your success as a real estate investor. Choose a hard money lender that is local and direct. Look for someone with a track record of credibility and transparency. Check the references and get referrals when possible. Your lender’s capability to close on time and honor the promised terms is just as crucial as their capacity to service your loan. Those chasing the rock-bottom rates should be ready for the bottom-of-the-barrel support.
Stick to the Budget
A quality hard money lender will decline your application if your profit margins are too narrow. Still, it’s your responsibility as an investor to identify the deals that are profitable and filter out those that might be too risky. If you have been pre-approved for a certain amount, don’t exceed it. Do not count on your realtor to determine the after-repair value of your home. Learn to run your own comps. Find a reputable contractor who would not low-ball you just to get the job and will keep asking for more money later on.
Be Efficient in Managing Your Construction Escrow
Many hard money lenders customarily arrange for the rehab funds to be placed in an escrow account. Both you and your lender have responsibilities when it comes to those funds. Your lender’s responsibility is to release the funds promptly and fairly. Your obligation is to complete your rehab according to the scope of work you’ve submitted.
Managing your construction escrow well is inseparable from the effective management of your construction team. It would be best if you made it clear to your general contractor that his payments depend on the progress he makes. Though it’s typical to advance some amount at the start of the process, you need to keep your crew motivated by not releasing their payments in large chunks.
Aim to repay your hard money loan fast
Hard money lenders take a significant risk by making high-LTV loans and charge for that risk accordingly. It’s to your benefit to pay off your loan as fast as possible. For example, if your regular monthly payment to your lender is $1,500, flipping a house in 8 months versus twelve months may save you as much as $7,000. With such savings at stake, you don’t have time to drag your heels.
Keep sufficient reserves
Hard money lenders that mean business want to see their borrowers have adequate reserves. Why? Because life happens, and you are bound to have extra expenses. The last thing you need is to have your job come to a halt because you don’t have money to pay for a new HVAC or fix a crack in the foundation.
Stay on top of your obligations as a property owner and a borrower
Owning a property and having a loan comes with obligations. Since you pledge property as collateral, your lender would not want it to go up in flames and will require the correct insurance. You will have a responsibility to pay property taxes. If you have a homeowner’s association, you may need to pay its fees and assessments.
Communication is the key
To succeed in the fix-and-flip business much depends on your communication skills. Reputable lenders will make it easy to reach their support team and their decision-makers. Do your part and reach out to your lender often to keep their apprised of your progress. Remember that the last thing a good hard money lender wants is to foreclose on you. Do not be afraid to share your challenges. Chances are your lender has seen other borrowers struggle with the same issues and might offer viable solutions.