Do You Want To Invest in Real Estate But Have No Cash or Bad Credit? No Problem! - Part 1 of 3
Don't allow a lack of working capital or credit challenges keep you from launching your real estate investing business. A great deal of investors almost never utilize their own money or credit to profit from their investments, at least not in the beginning of their careers.
You want to be a bona fide real estate investor. You covet the money, the lifestyle and the freedom. A lack of working capital is holding you back. Or maybe your credit challenges are standing in the way of qualifying for reasonable financing terms. Don't despair. It can be done. As a matter of fact, a great number of real estate investors almost never utilize their own cash or credit to profit from their investments, at least not in the beginning of their careers. In the following weeks, I will be discussing three ways you can invest in real estate without using your cash or credit. As you grow as a real estate investor, you will continually discover creative ways to invest in your deals. Once you have the experience, finding the money will become secondary to finding the deal. This is all part of the fun. Hard Money Lenders
Hard money lenders are a great way to fund your initial investments. Granted, they are expensive; their rates will make you cringe, their loan-to-value ratios are low, and they usually slap on a prepayment penalty. On the other hand, if you have a deal under contract with a conservative loan-to-value ratio of 65-70% that you need to close in a hurry and you don't have stellar credit history, then a hard money lender may be perfect for you.
Before agreeing to anything in writing, be clear as to the stipulations of the proposed financing. These are important items to keep in mind:
1. Total cost of the loan
Ask the lender about their origination fees and processing fees as well as title and escrow charges. Request a good faith estimate. Hard money lenders are not regulated in the way that traditional mortgage lenders are. Expect their fees to be significantly higher, two to ten points in origination alone. Remember, all fees are negotiable.
2. Negotiate the prepayment penalty
If you are flipping, you only need a loan for a few months until resale. Request an interest guarantee in lieu of a prepayment penalty. An interest guarantee differs from a standard prepayment penalty in that the lender will collect a certain amount of interest form the funds they lend to you regardless of when the loan is paid off. A typical prepayment penalty is for one to three years; therefore, if you pay off the loan prior to the expiration of the prepayment penalty, you will be obligated to pay approximately the equivalent of six months worth of interest on your loan as a penalty.
With an interest guarantee, every time you make a payment on your loan, the interest portion will be considered as payment towards your interest guarantee. This means that if you take out a loan with an interest guarantee of six months and you sell the property within four months, you will only owe the hard money lender two months worth of interest at resale. Interest guarantees are usually a better deal.
It is common for the lender to request a six-month interest guarantee, which is the standard amount of a prepayment penalty. Just like everything else associated with real estate investing, this is completely negotiable. Request two or three months and see what happens. Do the math! Make sure that interest guarantee makes financial sense.
3. Request no out-of-pocket investment
This is exactly what it says: you do not invest anything out of pocket in order to close the loan. All you can do is ask. This will probably make the lender somewhat uncomfortable, although he or she may be inclined to forgo a cash investment since the approval of the loan is largely based on the After-Repair-Value of your property. The majority of lenders want to ensure you have enough resources to cover the cost of repairs, closing costs and holding costs. They expect borrowers to pay for loan charges at or before close of escrow.
4. Request money for repairs
It is possible to receive a draw for repairs. Most lenders will require invoices from contractors and subcontractors before the work is completed. Draws are usually disbursed once the completed work is inspected.
5. Request deferred interest
Some lenders will consider deferring interest payments until the total loan pay off. This is typically offered only with short-term loans with maturity dates of less than six months. For longer-term loans, the lender may still defer interest during the rehab period. Again, asking for what you want is a crucial part of the process.
6. Have a clearly defined exit strategy
Hard money loans are interim loans that stay in place for up to three years. They are a temporary solution to an investor's financial predicament. The lender will want to know if you plan to keep the property for cash flow purposes or if you plan to sell before the end of the loan period. In either case, the lender will want to know how you plan to execute your course of action. Your exit strategy is very important because it informs the lender of exactly how you anticipate repaying the loan and confirms whether approving the loan will benefit everybody involved.
7. Shop around
When it comes to real estate, everything is negotiable. It is essential to comparison shop. Don't be afraid to inform your lender that you are looking for a great deal. This may give you a stronger negotiating position. Sure, you will run across a lender or two who will slam the door in your face. Nevertheless, this is a numbers game. The more people you connect with, the better your chances of finding a good lender to work with on a regular basis. So, go out there and find the best deal you can get. Note: Another benefit to using a Hard-Money Lender is that you can use their funds for short sales as well.
Hard-Money Lenders are just one way to invest without using your own cash. Again, shopping around for a good lender and establishing a good relationship with that lender are key factors in your success as a real estate investor. Using a Hard-Money Lender is a great way to close a deal, yet there are still more options. Another option will be discussed in Part 2 of this three part series.
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ABOUT THE AUTHOR
Brenda Coté is a Real Estate Investor, Real Estate and Mortgage Broker, Mentor, and Wealth Coach. At Transforming Lives, Creating Wealth, Brenda employs a "whole person" approach to support female Real Estate Investors succeed in business and life. To download Brenda's FREE audio workshop, "The Seven Elements of a Wealth-Creation Mindset" please go to: http://www.TransformingLivesCreatingWealth.com