Being a professional real estate investor involves many things. One major part of this role is to learn to understand numbers for what they are. Whether you are trying to negotiate a scope of work with your contractor or fine tuning the terms on a mortgage, your ability to understand the numbers game is going to play a huge role in your career. In many cases it will also save you thousands of dollars in your pocket which if otherwise overlooked could be lost and eaten up in fee’s.
I will be going over B lenders, a.k.a. hard money loans. There are many different areas of real estate investing and learning to read the numbers and asking the tough, not always comfortable questions is going to enhance your skills in this business.
Whether you are raising capital from a family member or having a bank fund your home purchase you will have to learn and figure what is going to be most beneficial for yourself and your companies growth. Not only this but if you’re using other peoples money (OPM) your ability to explain the difference between an equity share loan vs. an interest only loan might mean you securing the money or not. We will be taking about B-lenders and how to understand this area of borrowing.
Most people have a basic understanding if any, of how conventional financing works at a well-established lender. Usually this looks like a 25-year mortgage and a 1-5 year term. What most banks call an “A” client. Your interest rate will hover anywhere between 2-5% in today’s economy. Now if understanding all the nitty-gritty details wasn’t enough imagine going to a B-lender who charges upwards to 12%, sometimes even 15% on there lending. This is a totally difference playing field.
There are many other pieces to the puzzle when you are working with most B-lenders (also referred to as “hard money” and or loan sharks). There can be built in lending fee’s and broker fee’s (from the mortgage broker who makes the introduction) and then interest rate on top of that.
In most cases these hard money lenders don’t usually care too much of how your credit looks as they do how attractive the deal is, what area its in or how much of a discount you bought it for. First thing you have to know about these lenders is in most cases is that YOU the borrower will have to pay any fee associated to making the deal close. Everything to paying for an appraisal ordered by the lender to even paying their side of the lawyer fees. This is imperative that when you are running your numbers to see if the deal still makes sense after paying all these fee’s.
These lenders in most cases will require you to put anywhere between 20-30% down on the mortgage. Not only that, you will also need to come up with the renovation money yourself. If you are planning on buying, fixing and selling the property you should look at lenders who have a shorter term on their lending. Most will have a six month minimum that you must pay regardless if the deal sells in the first month or the last month. The great thing about dealing with these lenders is that unlike the bank… EVERYTHING is negotiable.
If you are dealing with a mortgage broker who has introduced you to one of these lenders they will usually tack on their fee (how they are paid) on top. It can run anywhere between 1-3% on the total cost of borrowing. Once you have an established relationship with the lender yourself this fee to the broker doesn’t last. However if it is your first few times borrowing this way you might have to pay it. There is always a fee charged by the lender too. It can also range anywhere between 1-3%. Keep in mind these fees can really cut into your bottom line so take your time and look at the numbers carefully.
So if the lender is charging you an average of 12% per annum on their money and you are paying 1.5 each to the lender and the broker. Your actual cost of borrowing isn’t just 12% it’s the fee’s on top of that.
I am not writing this to scare you however you need to understand how these lenders operate and if the deal makes sense. Just make sure by working with each other you are creating a win-win relationship with everyone involved. Make sure you understand the lending game and if you don’t, don’t be afraid to ask!
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By Manjit Rukhra