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Hard Money Guide

Hard Money Guide

Hard Money Guide When hearing “hard money loan” or the words “private money loan”, what is your initial thought?

In the past there have been some shady lenders that tarnished the industry of hard money lending when some predatory lenders attempted a ‘loan-to-own’ method that provided loans that were quite risky to borrowers who use real estate for collateral, which the intention was for the properties to be foreclosed. Fortunately, those dark alley lenders making sky-high interest loans are a thing of the past and do not exist in hard money lending today. However, there remains a certain residual stigma for real estate investors that have not used recent services of a reputable hard money lender.

Within this article, the basics will be covered regarding hard money loans, it includes:

What’s a Hard Money Loan?

In simple terms, hard money loans are short-term loans that are secured with real estate. Funds come from private investors, or fund of investors, rather than a conventional lender like a credit union or bank. Generally, terms average 12 months, but the loan term may be extended to a longer term of 2 to 5 years. Hard money loans require borrowers to make a monthly payment to cover just the interest, or interest plus a portion of the principle. At the end of the term, making a balloon payment is common.

When it comes to the overall amount that hard money lenders can lend a borrower is mainly based on the overall value of the subject property. Properties can include already owned property the borrower would like to use for collateral, or it could be a property being acquired by the borrower.

A hard money lender is mostly concerned with the property value, instead of credit score of the borrower. However, credit score remains a partial factor. A borrower that is not able to obtain a conventional loan because of recently foreclosing, or a short sale may still be able to obtain a hard money loan with a sufficient amount of equity in a property which is used for collateral. When banks tell you “No”, hard money lenders may tell you “Yes”.

Types of Property for Hard Money Loans

Borrower are able to obtain hard money loans on just about any property type, including single-family or multi-family residential property, commercial property, industrial property, even land.

There are some hard money lenders which will specialize in a certain type of property, such as residential, and be unable to provide land loans, just due to their lack of experience with the area. The majority of hard money lenders will have a certain loan niche that they are comfortable with. It is important to ask ahead of time which loan types they are able and willing to do.

Furthermore, there are many hard money lenders that refuse to make deals using owner-occupied residential property because of additional regulation and rules. However, there are some that do not mind wading through paper work. Any hard money lender will be willing to do loans in the 1st position, however there are less that are willing to do 2nd position loans because the risk to the lender is increased.

What Types of Situations Should Hard Money Loan Be Used For?

While hard money loans can be helpful, they are not the appropriate approach for all situations. When you are planning to purchase a primary residence, have good credit, an income history, and no problems such as foreclosure or short sale, the best approach for the borrower would be to use a conventional financing method with a bank, if there is time to go through the lengthy process of approval that banks require. However, when conventional financing through a bank is not an available option, or you need the loan in a shorter time period, hard money loans may be the appropriate approach.

The following are ideal situations for hard money loans:

  • Land Loans
  • House Flipping
  • When borrower has issues with credit
  • Construction Loans
  • When real estate investors require fast action

Who Should Use Hard Money Loans?

Hard money loans are used by real estate investors for various reasons. However, the main reason behind using a hard money loan is the quick process of obtaining funds. It is common for hard money loans to have funds available within a week, compared to 30 to 45 days from a loan funded by a bank. The hard money loan application process usually takes one to two days, while some loans may be approved the same day. With a bank loan, you are lucky to hear back about the approval the same week.

Being able to obtain funds at a quicker rate compared to a traditional bank loan provides a large advantage for the real estate investor, especially as real estate investors attempt to acquire properties that have numerous competing bids. Therefore, a quick close using hard money loans can be used to obtain the attention of sellers, setting offers apart from other buyers using a slower conventional method.

Although, another popular reason for investors using hard money loans is that a bank has rejected their application for a conventional loan. Because things do not always happen as planned, things in the past can prevent banks from approving a loan, including foreclosures, short sales, and credit problems. Also, banks require an income history. If the borrower has recently obtained a new job, this may cause banks to deny a loan request simply because f insufficient income history. The bank does not focus as much on a health income amount, as they do the income history. However, a hard money lender is able to assist with a loan without stressing over these areas, long as loans are repaid and the equity value of the property is enough.

Hard Money Loan Interest Rates and Points

When it comes to the interest rates and points that hard money lenders charge, it varies between lenders and region. For instance, a hard money lender located in California will often have a lower rate than lenders located in other areas of the country, because there are many hard money lenders in California. Due to an increase in competition, prices decrease.

Compared to a conventional bank loan, hard money lenders have a higher risk rate when loaning funds. Because of this increased risk, hard money loans tend to have a higher interest rate than your conventional loans. A hard money loan can have an interest rate ranging between 10% to 15%, depending on the lender and their risk in lending the funds. Meanwhile, points may range between 2% and 4% of total loan amount. Based on loan to value ratios, the interest rates and points can greatly vary.

Loan to Value Ratio of Hard Money Loans

For a hard money lender to determine the amount they are able to lend, they use a ratio of loan amount, which is divided by property value. Thus, the term loan to value (LTV). It is common for many hard money lenders to offer between 65% and 75% of the current property value. However, there are some lenders willing to lend based on the after repair value (ARV), where by estimating property value after improvements are made. From the perspective of hard money lenders, this increases the risk as the amount of capital the lender puts in, will decrease the capital investment of the borrower. Because of the higher risk involved, hard money lenders will have a higher interest rate.

Also, some hard money lenders are willing to lend a higher percentage of the after repair value, or finance the cost of rehab. From the borrower’s perspective, this may sound great, but due to the higher risk involved, they have a much higher interest rate and points. For this type of loan, you can expect an interest rate between 15% and 18% and 5 to 6 points when lenders fun a loan with a small to no down payment from borrowers. Although, there are situations where it will be worthwhile for a borrower to pay the exorbitant rates to secure deals if they are able to generate a profit on the project.

Hard Money Loan Borrower Requirements

As previously discussed, the main concern of hard money lenders is the equity amount a borrower invests within a property being used as collateral. The credit rating of a borrower and credit problems such as foreclosures or short sales can be over-looked by hard money lenders, long as the borrower has enough capital to pay the loans interest.

In addition, hard money lenders have to take the borrowers plan of the property into consideration. Borrowers have to present reasonable plans showcasing their overall plan for the property, and how the intend to pay the loan off. Generally, this includes making improvements on the property, then reselling it, or obtaining a long-term financing option later.

Locating Hard Money Lenders

There are various ways that you can go about locating a reputable hard money lender in your area. An easy method for finding a local hard money lender is using Google to search for the following: [your area] and “hard money lenders”.  The search results will provide individual companies, along with a list of various hard money lenders that others have complied. This provides many lenders to start contacting, then evaluate the ones of interest.

In addition, you can locate hard money lenders by attending a local real estate investor club meeting. Most cities have these club meetings, and hard money lenders tend to attend in search of networking with potential borrowers. However, if there are no hard money lenders at the meeting you may ask other real estate investors if they can recommend a hard money lender. You may find that conventional mortgage brokers, real estate brokers, or other real estate professionals can refer experienced hard money lenders. You can see which hard money lenders are most recommended by leveraging your current network.

Hard Money Loans in Arizona

In Arizona the most experienced and trusted hard money lender is Brad Loans by eMortgage.  For over 40 years our real estate and hard money lending experience has made us the expert in the Phoenix Valley.  We fund both owner occupant hard money loans and real estate investment loans that are common for fix and flip projects.  Our team can help you purchase a property or refinance a property you already have purchased.  Borrowers with no credit or bad credit are accepted and we can loan up to 100% loan to value with cross collateral. If you are in Arizona and are looking for a hard money loan to purchase a property, look no further than Brad Loans.  To apply for a hard money loan please fill out our loan application form.

For more information please call 480-948-0880.

Private money lending in an IRA

Private money lending in an IRA

If you’re searching “Private money lending in an IRA” we have the knowledge and experience you need.  When you use an IRA to invest within a private loan or hard money loan, it is a great strategy to enhance your returns.

HARD MONEY LENDING

The term IRA is used loosely when it comes to referring to any type of retirement account such as the standard IRA, SEP-IRA, 401K, Roth IRA, Money Purchase Plan and the Defined Benefit Plan. There are a lot of legal differences in retirement accounts, but when it comes to the purposes of hard money lending as well as private money lending, they will be lumped together as one for an easier reference. Since various states will use different security instruments for loans, the generic reference of note or mortgage shouldn’t be interpreted to mean trust deed, mortgage, land contract, or promissory note.

Many people honestly believe that funds that are in IRA’s are limited to only investments in bonds and stocks. That just isn’t true. IRA’s are able to be invested in various alternative investments like private placements, mortgages, limited partnerships, real estate, and just about any other type of investment that you can think of. The key is to be able to use a special custodian, like Pensco Trust Company, that will manage and properly account for your transactions. The custodians handing of alternative investments are normally referred to as self-directed IRA custodians and are a great way to make hard money loans or private loans.

We will now begin to explore note investing in your IRA by considering a simple case: Bob investor makes a $100,000 interest only loan to Mr. Barker at 6% interest and originates the loan using his self-directed IRA. For it being our first case, we should assume that Mr. Barker pays each loan payment on time and pays the loan off before 5 years.

Life is great for Mr. Barker and Bob private investor. Mr. Barker gets a private loan that he may not have gotten and Bob investor enjoys 6% tax deferred income in his IRA.

So, how would you make this simple hard money loan using IRA funds? It isn’t very different than getting a mortgage from your traditional checking account. Simply, follow the six steps below:

Open Self-Directed Retirement Account

Most of us are used to using the big brokerage houses as our custodian for our retirement savings. But, it is those firms that will only permit investors to invest in publicly trader securities and personal loans are not an option. There are plenty of companies that do specialize in self-directed investments which allow you to move into an area that is referred to as alternative investments.

Properly Vest a note for Hard Money Loans

When it comes to traditional transactions, your note may be vested in your name or the name of your company, but in a self-directed IRA there is normally more details when it comes to vesting the note. An example of this we will reference the custodian and the account number and IRA holder:

XYZ Custodian Company, FBO “Bob Investor IRA Account #098765”.

Sign all agreements which will authorize your custodian to fund the note.

The Custodian will then have pre-established procedures that you will need to follow and most will have a form agreement for you to sign. Brokers that specialize in private money lending will be glad to help you. This particular agreement will authorize the custodian to release the funds. Many custodians will also have a checklist that you can use to ensure that you will cover each step as the loan begins.

Close the transaction.

Most investors will use an escrow, attorney, or title company to close the transaction. Select the right party that has worked with a self-directed custodian and your life will be so much easier.

Send Copies of the security agreement to your custodian.

Once the note has been funded, the IRA custodian will need to keep the actual promissory note and recorded security instrument such as a mortgage, deed of trust, etc. This is very similar to the conventional IRA brokerage holding on to your stock certificate.

Get with a servicer to send payments to your custodian.

Many investors will use a third-party loan servicer in order to collect payments from the borrower. The servicer will then have an authorization agreement which will state who the payments are sent to.

AVOIDING HARD MONEY LENDING

Even though it is nice to think that all borrowers will pay on their mortgages as reliably as Mr. Barker does, it is normally not the case. Believe it or not, note private investing will get more complicated when the borrower does not pay on time and then there are more problems that are particular to retirement accounts that will make note investing very risky if you do not know what to look for.

Hard Money Advances

There are plenty of times when an investor needs to have advanced funds against their mortgage. An advance happens to be a payment of funds by the private investor for something that should have been paid for by the borrower, or for services that are needed to collect collateral. One advance example happens to be insurance. The borrower’s home insurance may lapse and in order to protect your note, you will need to advance to renew the policy or advance in order to force place insurance from a specialty insurance company.  Delinquent property taxes are another good example when it comes to advancing may be needed on a private loan.

When it comes to traditional loan investment, there is an issue when it comes to advancing funds which is coming up with the advanced funds. With a self-directed retirement account, you will first need to figure out how you will get the money into the IRA before you are able to advance it. If you have already maxed out the contribution to your IRA you may not be able to get an advance.

Advances can be large. Consider a foreclosed home from a hard money loan, that upon possession needs $50,000 to remodel it to get it to fair market value for the property, or you can consider bankruptcy that will last for several years and will require the advance of thousands of dollars in Sheriff or trustee and attorney fees.

Make notes that you are not allowed to pay for any type of IRA owned asset or IRA expenses personally, as this is considered prohibited transactions such as being considered self-dealing with your IRA. You will need to remedy for the shortfall of funds on your IRA which would be to transfer funds from any other IRA that you might have at another institution or to rollover funds from another qualified pension account.

If those solutions do not work, there are other types of alternatives. The Department of Labor, which governs over retirement accounts has recently issues some guidelines that will enable you to make a loan to your IRA. The loan may be made to your IRA, if it is interest free, unsecured, and provided that it is:

  1. A) For the payment of any ordinary operating expenses, or
  2. B) For the purpose of incidentals to the operation of the IRA.

If the loan is supposed to be for longer than 60 days, then the documentation for the loan must be created and then signed prior to the expiration of the 60 day period.  Loans cannot be used to increase your purchasing power of your IRA. Take for example, you are not able to loan your IRA $100,000 to purchase another property.

PROHIBITED TRANSACTIONS

When it comes to using an IRA to invest in real estate or notes, it is vital to avoid completing a prohibited transaction. It is this type of transaction that is improper use of your retirement account by you, your beneficiary, or any other disqualified person. A disqualified person is your fiduciary or members of your family such as your spouse, a lineal descendant and any spouse of a lineal descendant.

The below examples are prohibited transactions with the traditional IRA:

  • Selling property to it
  • Using it as security for a loan
  • Borrowing money from it, except as outlined within this article
  • Purchasing property for personal use for future or present with IRA funds
  • Receiving any type of unreasonable compensation for managing the IRA funds

Essentially, you will need to conduct your business with any unrelated third parties. So you would not want to make a loan to a stranger, then hire your spouse to service the loan. You would not want to hire your brother to do your taxes for a certain fee charged to the IRA. You must be very careful. The prohibited transactions are not always obvious. You should consult the attorney, a CPA, or your custodian that is well versed in these types of transactions before you are able to experiment on your own. There are several self-directed custodian companies that will be able to maintain a directory of professionals that will specialize in these areas and will be a lot of help.

If the IRS determines that you have conducted a prohibited transaction, your whole IRA may then be disqualified and subjected to substantial fines, taxes and penalties.

UNRELATED BUSINESS TAXABLE INCOME (UBTI)

Unrelated business taxable income is normally defined as the gross income that comes from any unrelated business or trade that is normally carried out by an exempt organization. The tax that is on the UBTI is called the UBIT or Unrelated Business Income Tax.

Most of the time, UBTI will come into play when there is debt involved in a real estate transaction. Take for example if your IRA purchases a home for $100,000nd you use $30,000 of the IRA funds and borrow $70,000. Even though the transaction is fine to do with an IRA, the IRS will not allow you to benefit from the whole income of the property. You may only benefit from the income as it relates to the IRA funded part which would be $30,000. This means that you would be paying 70% tax on the investment income and income of the property if there is any and then receive tax-deferred benefit from your IRA of 30%. The debt financed portion is known as the Unrelated Debt Financed Income or UDFI.

Many people truly believe that the UBTI is not permitted within your IRA. It is actually permitted. You will have to be completely aware of it and ensure that your tax accountant files that right form (IRS 990 T form). If you are investing in a partnership that happens to be purchasing mortgage notes or real estate, you should be very careful that you know exactly how the partnership is planning to use the leverage, if at all. The use of leverage in the partnership, if it is not properly documented and treated may then create unintended UBTI which is potentially subjected to large penalties and fines.

When it comes to the note business, UBTI may come in to play when you foreclose on a home and take the existing lien. Take for example your IRA lends a second mortgage for $50,000 when the first mortgage is $100,000. If the investor foreclosed, then the investor would then inherit $100,000 worth of debt and may be subjected to UBTI.

What you may not know is that this type of scenario only really comes into play if the investor converts the property into a long-term rental hold. Due to the debt being acquired was a normal part of the operations of the mortgage note, the UBTI would not be considered if the investor liquidates the property.

There are a lot of complicated rules that surround leverage and the use of retirement accounts. You should be aware that the leverage and impact to your IRA and consult professionals in order to guide you to ensure that you are making prudent business decisions.

USING AN LLC OR CORPORATION

If you plan to make several loans from your IRA, then you may want to become an LLC or corporation. When you set this up, you will have your IRA be the owner of the company while you may be the president. As the president, ensure that you do not pay yourself, as that would be a prohibited transaction. Be aware that many custodians will not accept single member entities such as LLC’s that are funded solely by an IRA and managed by the IRA for fear that the IRA owner will expose their IRA to disqualification as the result of prohibited transactions. Many custodians will review your investment transactions that they execute for their clients with the intent to prevent any prohibited transactions.

Whenever an IRA fund is invested in and LLC, the IRA owner will be the president and the custodian is no longer involved with the transaction execution as everything will be handled by the IRA owner and president. There are some custodians that have addressed several concerns about having a potential prohibited transaction, while still managing to accept the single member investment entities, which require a qualified and independent professional such as an attorney or CPA to sign an agreement that states the client requires that they review and then approve each transaction.

The benefit of setting up an IRA that way is that when your IRA purchases 100% interest in a new corporation or LLC, the cash is then sent to the checking account of your new company. The mortgage notes that you have vested are in the name of the company and not your IRA and you have checkbook control of your own IRA, which makes it easier to advance funds, make loans, etc.

DISCLAIMER AND LIMITATIONS OF USE

The contents are contained and maintained on this guide website are solely for educational or informational purposes only and no portion or content of this content should be considered or relied upon as financial, investment, or legal advice. The provided content of financial, investment, or legal service or as the recommendation of forms or opinions are from the author of this content.

Receiving Your First Hard Money Loan

Receiving Your First Hard Money Loan Phoenix AZ

This post is especially for NEW INVESTORS. However, any investor who plans to fund a deal with a hard money loan will benefit from the information here.

A Hard Money Loan for Your First Deal

Your first deal as a real estate investor is the most important deal of your career. It’s the deal that gets your foot in the door of the real estate investing game. For most new investors, the success of that first deal is going to depend on whether or not you get a hard money loan to fund it.

“Why a Hard Money Loan for My First Deal?”

That’s a great question! Answer: Hard money loans are almost always the only type of loan that new investors can get for their first deal or two until they build some capital.

That being said about using a hard money loan for your first deal . . . I suggest that you think like a tourist when you invest.

New Investors Should Think Like Tourists

Going on vacation involves a lot of planning, and the most important part to figure out before you go on vacation is where to go. Planning your first real estate investment deal is exactly the same. Where you invest is the most important part of your planning.

The reason? Just like with your vacation, you want to make sure that you get the most bang for your buck when you invest. We’re all probably well-aware that some places are hotter for real estate investing than others because of market conditions. So, that’s the first part of it.

The other part may not be as familiar to you . . . Did you know that some states are better than others for getting approved for a hard money loan?

It’s true. Most of it has to do with lending and real estate laws that differ from state to state. Some of these laws are hostile to the real estate investing and hard money lending processes — stuff we can blame our congressmen/women for.

So even if you find a really killer deal in some states, you could end up flat on your face with no way to get the funding you need, unless you know the best places to invest in real estate when it comes to hard money loan approval.

The Best Places to Invest in Real Estate

Simply put, the best places for new investors to invest are states where the markets are good and where you have the best chances to get approved for your hard money loan.
Here are those states: Arizona, Colorado, Georgia, Nevada, North Carolina, Oregon, Texas, Virginia, and Washington. These are the best states to invest in for new investors. Stick to these ones, and you can count on hot markets, good deals, and easy hard money loan approval.

What Other Hard Money Lenders “Forget” to Tell You

  • I could get a lot of flak from other hard money lenders out there for telling you this, but I don’t care.
  • I’m sick and tired of hearing about hard money lenders who take advantage of investors (especially new investors) by feeding them mis-information about what it takes to close a deal.
  • Sometimes it’s even worse when they give no information at all.
  • All they want is to get the investor’s money, so they conveniently “forget” to inform them of some of the most critical realities of real estate investing.
  • I’m talking specifically about the starting money that investors need to make a deal, expenses not covered by the loans used to purchase the property.
  • (Yes, in addition to these loans, you need other monies to fund your deal. If this comes as a surprise to you, then you are exactly why were writing this post.)

Three Types of 100% Financing

Chances are that you didn’t even know there are 3 different kinds of 100% financing for real estate investment deals.

Don’t feel bad. It’s not your fault. The reason for the obscurity on this topic is because nobody ever talks about it. So I’m going to spell it out here once and for all.

As you probably do know, the majority of hard money loans cover somewhere between 60% and 75% of the property value or after repair value of the property. If the deal you found is a slammin’ one — such as the case with my caller the other day — a hard money lender might choose to finance the deal 100%. This leads into the first type of 100% financing.

Type #1 – This first type of 100% financing covers 100% of the purchase price of the property. But that’s it. You still have to pay for repair costs, closing costs, earnest money and all those other fees on your own. This type is what most lenders mean when they use the phrase “100% financing.”

Type #2 – Very rarely, and only if your deal is a really really slammin’ one, a hard money lender may finance repair costs and the closing costs in addition to the purchase price of the property. The investor must still bring what I call “starting money” (earnest money, evaluation fees, inspection fees, etc.) to the table.

Type #3 – The Holy Grail of investment financing! True 100% financing for everything — purchase price, rehab/repair costs, closing costs and all those starting money items. This financing option is the only way for investors to get into deals without any money of their own whatsoever, and practically nobody offers it. (But we do.)

With that wind-up you’re probably dying to hear about how we accomplish true 100% financing for our clients. I’m going to explain that in just a minute, but first I have something important to say about starting money.

Turn $1,000 Dollars into $10,000

Here’s a table that itemizes those things for you:

Common Starting Money Items
Item Cost
Earnest Money $500 – $1,000
Evaluation $600
Inspection $500
Total: $1,600 – $2,100

Starting money. This is the term that I use for earnest money, evaluation costs, inspection fees and other expenses that investors almost always have to fund for themselves.

These expenses are the most commonly overlooked aspects of every real estate investment deal.

It is possible to get a true 100% financing option to cover these expenses. This is especially helpful for new investors who don’t have their own starting money.

However, the majority of investors out there will have to cover these costs themselves on most deals.

If you’re making a lot of offers or planning to make a lot of offers, doing some simple math in your head should tell you that these costs can add up fast. For many investors, lack of start up money is the number one thing holding them back from making more offers.  To get the money you need, faster than the competition, consider a hard money loan from Brad Loans.

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