Six Tips on How to Make Money with Hard Money Loans

If you are a real estate investor looking to fix and flip properties, chances are you might have heard about hard money loans. Hard money loans accommodate the needs of investors by providing them with the leverage they need to compete with all-cash offers. Conventional lenders don’t lend on properties that are distressed, take too long to close, and have complex underwriting criteria. There are numerous advantages to hard money lending, but hard money loans are not for everyone. To complete a successful flip using hard money loans, follow these six easy tips.

Spend time choosing a hard money lender that is right for you

Avoid brokers and pick a direct lender. Direct lenders lend their own money and are more flexible in their underwriting. Real estate is a local business, so you will be better served by a lender who knows your area well and can steer you away from mistakes. Seek someone with a reputation for credibility and transparency. Take a look at their online reviews and, when possible, ask other investors and your realtor for recommendations.

Understand your deal’s profit potential

A first-rate hard money lender will avoid funding transactions that have slim profits. Still, it's your obligation to learn how to identify money-making opportunities and avoid deals that are not worth the effort. Find a good hard money calculator and learn how to use it. Don’t rely on your agent to come up with the expected after-repair value. Run your own comps that are based on the recently-sold prices of similar homes in the neighborhood you’re buying in.

Find a trustworthy contractor and manage him well
The right contractor is paramount to your success. Find one that is both priced well and reliable. If you’re just starting out in the rehab business, ask several contractors to submit their quotes. You want a good value, but don’t chase the lowest price: you want to make sure that your contractor will not bombard you with the requests for additional funds once the process starts. Maintain as much control and supervision of the process as your time allows. If possible, ask your contractor to separate their material and labor costs into separate categories.

Don’t drag your feet on repaying your loan

Hard money loans are not cheap. To reduce their cost, you should aim on repaying them earlier rather than later. Make sure that your hard money lender doesn’t have a prepayment penalty. “We encourage our borrowers to pay our loans as quickly as possible,” says Anastasia Sennott, a partner at New Funding Resources, a hard money lender in Maryland. “The faster they rehab and sell the property, the more money they make, and we can deploy the funds elsewhere.”

Maintain adequate savings to honor your obligations

Why do you need reserves? Because you need to make monthly payments to your lender. Because life happens and stuff breaks. You might not have planned to work on that roof, but the first heavy rain made its issues apparent. Your contractor might have dropped the tub and you now need to get a new one. Taxes are as certain as death, and you need to pay them. The truth is that owning real estate is expensive, and until you sell it and make a profit, you will be in constant need of cash to take care of one issue or another.

Communicate effectively

A reputable lender will make it easy to reach the decision-makers and will have a support staff that is knowledgeable and responsive.  Make sure that you do your part in keeping them updated. If you run into any issues, let your lender know. Together, you can work on a solution that minimizes the risk exposure for all parties involved.

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