A First Time Investor’s Guide to Real Estate Lending

California hard money

Are you new to the real estate investment industry? There are a lot of profits to be made in real estate, if you know what you are doing. However, everyone has to start somewhere. One of the biggest challenges that newbies to the investment industry face is lending. Real estate investing requires capital for purchasing the property, for home repairs and renovations, and for real estate costs. Because most people do not have large amounts of cash simply lying around, a loan is often needed. You will find that many real estate investors choose private money loans.

Time restraints
A good real estate investment deal requires speed, especially when you are new. Other, more seasoned investors usually are well connected and are aware of potential real estate deals the minute they come onto the market. If you want a chance at being competitive, you have to be fast. You have to view houses right as they come onto the market. You have to make a buying decision immediately and quickly submit your offer. This usually means that you cannot wait around for a mortgage approval. By the time the mortgage lender evaluates all of your information, the house has already been purchased by another investor.

Private money loans solve this problem of speed for many investors. Hard money deals are often sought after for their quick turnaround (usually within 7 to 14 days to process). You can get private money loans at a quicker speed because the same documents and information is not required. Your hard money lender will not request specifics about the property. They will also not insist on inspecting or viewing the property. This significantly speeds up the lending process.

Other business requirements
You may or may not be registered as a business. Some real estate investors turn their skill into a business, while others simply do it as a side project. While registering as a business requires specific paperwork and detailed requirements for lending, you will find that it helps with things like liability and legibility. However, you will want to understand your lending requirements as a registered business. A typical bank loan borrower looking to take out a business loan has to be 2 years in business, have at least $250,000 of annual revenue, have good personal and business credit, and be cash flow positive.

High risk for private lenders
Because private lenders take on higher risks, their fees are also substantially higher than traditional lending institutions. The United States remains in debt, despite the recovering real estate market. To further add to this debt, real estate lenders are increasing their lending fees. With hard money loans carrying higher risk, their rates are even higher. Additionally, the lender is likely to require a higher amount of equity. Most hard money loans are secured by a property with 30% to 50% equity, so the investor is well protected. These hard money loan rates are something that must be accepted in order to quickly receive funding and access to the money.

Other important ways to protect your investment
High interest rates and secured equity can be scary for a first time investor. You can further improve your knowledge and chances at a successful real estate deal by learning extensively about the market. Work with local real estate agents, real estate investors, and lenders. Learn about the areas that are selling and the ones that have slowed down. Take note of the type of houses that sell the best. Work closely with contractors to ensure you choose a property that can be quickly renovated and then sold. The more you are informed, the more likely your first project will go as planned.

Private money loans are no secret to real estate investors. In fact, the majority of investors utilize these loans because of their time benefits. A first time real estate investor that wants to be competitive amongst other investors would likely also benefit from these hard money loans. However, it is important to also understand the risks and have a solid business plan for success.

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