Hello and welcome to the second installment of this series where I am answering your most important questions about investing in real estate.
We had a great response to my test run last week, so I’m going to keep doing this as long as there are enough people that find value to it…
Last week we talked about hard loans and if a low interest rate was all you needed. Today we are going to discuss a question that poses huge problems for many people trying to break into the real estate investing game.
“How can I find money to fund the repairs on fix and flips?”
We get anywhere from 250-300 loan applications each month. The majority of these never get to closing because the potential borrower was mis-informed about how hard money lending works.
So let’s dig deeper into that for a moment, so you have a good understanding. Hard money lenders will only lend based on the after repaired value (ARV) of the property. And the max any lender will go up to is 70% of the ARV.
That is the total amount they will lend for both purchase price and rehab costs. Then on top of this, you need to have money to pay the points and fees on the loan at closing.
In order to get 100% financing for both the purchase price and rehab costs, you have to be buying a sweetheart of a property, where you are buying it at a low ARV.
And even if you are getting an awesome deal, the points and fees at closing are going to be at minimum $2000. Most newbies don’t realize that they will need to come out of pocket at this point and they don’t have the cash to close.
The other situation is where people aren’t buying the property at a low enough ARV to get 100% financing. They have a “gap” between what the hard money lender will give them and what they need to purchase and rehab the house.
The fallacy is that while yes, there is 100% financing available, it does NOT mean that you won’t have to put up any money out of your own pocket.
Well, I’m totally broke, what can I do?
Here’s a strategy that only the savviest of investors know about: combining hard money lending with private money lending.
Usually the gap that investors need to cover isn’t very much. What you can do is approach a family member, friend, etc. to stake a claim into your investment. What they do is pony up the gap funding and gets an appropriate percentage of the profits in return.
If you work this angle right and successfully complete your flip, you’ll have enough profits that you can go into your next deal with the cash you need to cover the gap yourself. Then you won’t need to rely on private money lending any longer.
Another way to find private money lending sources is through the internet. There are quite a few places out there that can connect you with a private investor who is willing to cover your gap. Just be on the lookout for scams and make sure you understand the terms of your agreement.
Lastly, at DoHardMoney.com we are working on developing some relationships with people who specialize in gap funding to help our investors get deals closed.
We expect to be making some announcements about this after the first of next year.
I’m going to leave you with this final thought…
Funding isn’t the main problem that is keeping you from making it in real estate. In fact, it’s simply a symptom of a much bigger problem. A problem that will guarantee you never succeed in real estate if you don’t recognize it and do something about it right away.