financing real estate investmentFinancing real estate investments has certainly taken its twists and turns over the years.

At one time, it seemed as if money from banks fell from trees and all you had to do was pick it up.

Then, as markets turned, finding financing for flips or any sort of real estate for that matter seemed a near impossible task.

Today, as the financing dust has settled, lenders of all stripes have begun to make real estate loans yet again but guardedly so.

There’s money out there, you just need to know where to find it and how to get it.

How Much?

The first consideration is determining how much money you will need to acquire, refurbish and sell a property. This includes costs for the acquisition and repairs that will be needed to prepare the property for sale.

Determining the acquisition cost is fairly straightforward; it’s the final sales price of the property you buy.

The next step is analyzing the costs needed to repair and remodel the home and you can simply make a few cosmetic changes, a major remodel or something in between.

Whichever path you take, remember that your flip must be in a condition for a bank to make a loan.

If the property doesn’t meet the bank’s standards, buyers can’t obtain financing and your buying pool will be reduced to cash buyers. Having a cash buyer is certainly a good thing but you don’t want to relegate your prospective buyers to such a strict pool.

When buyers obtain a mortgage from their lender, the lender evaluates not just the creditworthiness of the buyer but also reviews the property being purchased.

The house is the collateral to the lender and if the buyers fail to make the payments on time and the lender forecloses on the property, the lender wants a marketable home in their inventory, not one that needs work. What do lenders look for?

Borrowers who seek long term financing will most likely obtain a government-backed loan such as an FHA or VA loan or conventional financing underwritten to Fannie Mae or Freddie Mac guidelines.

Regardless of the loan type, lenders will require the property be in good condition and be considered “habitable.”

For example, if a property has a faulty foundation and needs repair, the lender will require the foundation be fixed before a loan can be considered.

Is the roof sagging or there is exposed wiring in the home or evidence of an existing moisture problem in the basement or from the ceiling?

Anything that would prohibit someone from living in the property on a day to day basis will stop a mortgage application in its tracks.

The minimum amount needed to finance repairs is the amount needed to qualify the home for a traditional mortgage. New paint? No problem, that’s cosmetic. Cracks in the walls and door jambs? Big problem and indicates serious settlement issues.

  Financing Real Estate Investment Sources: Private Money

If the property indeed does need major repair and you need financing to complete your flip, you need the services of a private lender.

A private lender is an individual or group of individuals who can evaluate real estate purchases on their own terms and aren’t required to adhere to traditional mortgage approval guidelines.

Private money is sometimes called “hard money” due to the nature of the loan.

hard money lendersDon’t be afraid of the term “hard money.”

The term earned its moniker due to the loan terms having higher rates and fees compared to more traditional forms of financing.

How much higher?

Hard money loans can be anywhere from 8 to 15 percent or more along with additional points and fees.

For example, if you need a loan for $100,000, you might pay an interest rate of 10 percent along with an additional 3 points, or $3,000. Private money loans are short term in nature, with loans due in as little as 90 days up to two years.

Using this same example, financing a $100,000 flip would cost $3,000 in points plus another $833 in monthly interest charges using a 10 percent, interest only loan. Add in the costs to repair the home plus the associated selling costs and private loans appear to be too expensive to be practical.

Yet in reality, properly placed, private money serves an important niche in the world of real estate investing.

Remember, private money is used when properties aren’t in good enough shape for a bank loan. This means the property is likely well under-valued and the owner desperately needs to sell and doesn’t have the funds needed to fix the home.

Private money provides you the opportunity to buy, fix and sell the home for a nice profit. When considering a private loan, the evaluation should be placed on the profit to be made on the flip and less on the rate and fees. If the math works, it doesn’t matter the loan costs.

  Financing Real Estate Investment Sources: Home Equity Loans

Perhaps the cheapest, most convenient source of funds to finance a flip is from the equity in your primary residence.

A home equity line of credit, or HELOC, is a line issued to you based upon the value of your home and any existing liens.

Many HELOC lenders offer equity loans from 70 – 90 percent of current market value of the home.

For example, your home is currently valued at $400,000 and you have an existing mortgage of $200,000. Your bank issues a HELOC at 90% of the value of the home less your mortgage, for a credit line of $160,000 to use any way you wish.

Interest rates and fees can be the most competitive source of funds today, with interest rates as low as 3.00 percent and interest is only charged on the amounts withdrawn from the HELOC.

A HELOC operates much like a credit card; as you make a purchase, you have the choice of paying the minimum payment the next month or paying all or part of the outstanding balance due.

With a HELOC, you get acquisition and rehabilitation funds for your flip almost immediately, rates are extremely competitive and you can pay off what you borrowed once the flip is sold, freeing up your equity line for future flips.

David Slabon