Investing for Dummies
I have wanted to get into real estate investments for many years now, but I never felt I really had the financial resources to get into the game. I looked at some flipping prospects and the possibility of working with experienced flippers, but the startup training costs where too much for my budget -- and if there is one thing I don't do, it is give a large amount of money on a "prospect" that I may make money. So, I took to reading all the investment books and articles well the “For Dummies” books. Then I went to a free seminar sponsored by a local investment group, and found the answer I was looking for. And, that answer hit me like a fat kids hits the buffet line!
Hard Money to the Rescue!!
Ahhh the bliss that is hard money! It is like Santa coming to me every day of they year -- whether I have been good or bad! Hard Money is a loan from a third party lender. Hard money lends you the purchase price of a home plus the rehab cost for the home, virtually eliminating my cash out of pocket on the front end.
Sound too good to be true? Well.... it’s not! Yes there are some stipulations included with hard money to be considered. Hard money loans come with higher interest rates, bigger origination fees on the loan and so on -- I mean you don't get something for nothing. If you know what you are doing, hard money IS a fantastic way to invest, for the run of the mill flipper or for the person who wants to own rentals -- as I now do. Each lender has different rules, but the industry standard is that you (the buyer) will pay somewhere between seven or eight percent of the total loan in closing costs. Some people may think this is a bit high, but the following example will show that “some people” are wrong.
Conventional Loan Example
52,000 x .20 down = 10,400 plus closing costs of $2,000 = $12,400. Property as it sits is worth $70,000 (for flipping).
Hard Money Loan
$52,000 + $9,500 of improvements = $4,613 closing costs out of pocket. Property once improved, is worth $90,000.
Fishing With Other People’s Money
Do the above numbers above sound fishy?? Well I must have a face like a Mackerel, because those are the exact numbers of my first investment property. A conventional loan usually requires 20 percent down and even if you are lucky enough to somehow get a loan that finances 100 percent on investment properties, you would still have to come up with the re-hab money out of pocket. If the re-hab cost is $20,000 per property, that will deplete your resources pretty quick.
The Magic Number!
When working with hard money loans the magic number 70: as in 70% of the ARV, which stands for After Repair Value. The Hard Money lender with lend against an appraisal up to 70 percent (could vary) that takes into account what the property will be worth once all repairs are completed. If you go above the 70 percent threshold, you are responsible for any additional costs out of your pocket. If you have a purchase of $47,000 and a rehab cost of $25,000 (= 72,000) on a home with an ARV of 100,000, you are responsible for the extra $2,000 above 70 percent. Not every purchase must be close to the 70 percent ARV, and each investor should decide on each property the number they are comfortable with.
Take the Dive the water is fine!
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