Texas Hard Money Lender

Sunday, October 27, 2019

Loans for Flipping Houses: Why You Should Avoid the Bank

Many are enticed to get into the flipping business, either by reality television or the prospect of tidy profits. But few people just getting into the business have cash in their pocket to buy and remodel a house on their own, and most need financing. If you are new to the flipping business, learn why banks and every other financing method out there is less than ideal in the case of fix and flip loans.

Someone new to the flipping business might leverage the equity in their home, refinancing their personal residence to embark on their first flipping project. Is putting your actual house on the line to flip another house a good idea? I'll leave that for you to decide.

Another strategy is to take out a small conventional loan to purchase the house, and then take out an unsecured loan to cover the cost of remodeling. This strategy is basically like getting a credit card to pay for your flipping project, and paying bills with a credit card is never a sound financial strategy. So why not just go to your friendly neighborhood bank?

A conventional loan will always fall short when it comes to fix and flip loans

Many novice real estate investors are lured to banks by the prospect of lower interest rates, but conventional lenders fall short in almost every respect the case of flips. First, the tedious application process could cause you to miss out on the best investment opportunities, as foreclosures and short sales move quickly and traditional lenders simply can't keep up. If the property you have in mind is anything less than livable condition, your application will be denied outright. But, there's a bigger reason to avoid going to the bank to finance flips

Without exception, even if a bank miraculously finances your flip, the loan will not cover the cost of your renovations. Ever. Banks give loans as a percentage of a property’s current value. Your bank loan might cover 90 percent of a $50,000 shack and this loan will get you that shack but nothing more. If you want to remodel the home thereafter, you will need to take out another loan.

So home equity, unsecured loans, and even banks fall short when it comes to financing flips, but not all hope is lost.

Hard money loans remain the best way to finance house flips

A cursory search of the term “hard money” might make you balk at the double-digit interest rates offered by these lenders. Understand that those double-digit interest payments don't amount to much as your plan should be to sell the property within a few months.

What sets hard money apart in the case of flips is that these loans are given as a percentage of the property’s value after it's been repaired. Unlike a bank loan, a hard money loan can not only can you get enough money to purchase a distressed home, but you also get the money you need to improve it.

This factor sets hard money apart from other types of financing, be it bank loans, unsecured loans or equity loans. Home equity loans put your house at risk, unsecured loans are expensive, and bank loans will not cover the full cost of a flipping project. If you want to get into the flipping business, your best bet is and likely always will be hard money.

Dennis Dahlber Broker Ri CEO Level 4 Funding LLC

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO

NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
© 2019 Level 4 Funding LLC. All Rights Reserved.

Saturday, October 26, 2019

Construction Loans: The Benefits of Short to Permanent Financing

Construction loans are a confusing issue, a Frankenstein of sorts among real estate financing, as they usually come in the form of two loans in one. The first covers the cost of construction while the other loan is a long-term, conventional-type mortgage. You risk less when you have refinancing built as part of your loan package.

Let us call the ideal form of construction financing "short to perm."

You have the option to get a loan that purely covers the cost of construction, but a short to perm loan with refinancing is better. Many articles on the internet cite vague, if not trivial benefits in the case of short to perm loans. Some of these benefits include you only need to pay closing costs once, which results in lower loan fees. Some talk up the fact that with refinancing built into your loan package your interest rate is locked in.

These are all nice benefits when it comes to short to perm loans. But it's safe to say loan fees are a minor expense in the context of a construction project. Also if you think about it, how likely are interest rates going to go up drastically throughout a 6-month construction project? Barring an economic meltdown, it is unlikely that this is going to happen.

The real advantage of having refinancing built into your loan package is that it protects you from risk should your project face an unexpected disaster, after construction finishes.

Singular construction loans may cover the cost of construction, but what if things don't go quite according to plan?

Say a developer gets a single short-term construction loan. He aims to construct a post-modern apartment building complete with a pool a gym, a sauna, and all sorts of other yuppie amenities. The initial monthly rent offered is pretty high as a result of all these features. After construction ends, potential tenants fret over the $2,000 initial rent, but this is the absolute lowest rent he can offer to break even and maintain all those shiny amenities.

Before his loan comes due his beautiful apartment complex lingers at roughly 15 percent occupancy, and bank after bank denies him the opportunity to refinance for this reason. The initial lender who financed his construction calls his loan, and he'll have to pay the full balance himself, and we can only hope this didn't ruin him.

Risk less in the case of construction loans by having refinancing worked out ahead of time

If our developer had refinancing worked into his initial loan, his project would still suffer as a result of low occupancy, and yes he'd still have a loan to pay. But by securing refinancing ahead of time, he would have time to maneuver and secure more tenants. Instead, he had to make a massive balloon payment to pay off his construction loan, without much in the way of additional money coming in.

In short, the main benefit of a short-term construction loan with refinancing built is that it assures you that you'll be covered if things don't work out according to plan.

Friday, October 25, 2019

Simple Strategies to Risk Less When it Comes to Fix and Flip Loans

More and more are getting into the flipping business. Look at the statistics. In 2017, 207,888 single family homes and condos were flipped, the highest number of homes flipped since the pre-recession heyday of 2006. The average profit made per flip last year was $68,143. That's serious money. The recent rise in flips indicates that many new people are getting into the business and its likely most of them are making use of fix and flip loans to do so. Learn some mistakes you want to avoid when it comes to financing flips.

Financing flips is in no way similar to financing a primary residence. These loans are for the short term, as no one in the flipping business plans to hold onto their property for the standard 15-30 year period. They are also expensive, and interest charged usually amounts to the double digits.

Considering the expense and the short-term nature of these loans you want to ensure that:

1. Your property can sell quickly

2. That you take out the smallest loan possible.

Consider the following as examples of what not to do in the case of fix and flip loans

• The HGTV'er: This flipper purchases a property that is pretty much livable. With just a fresh paint job and some new carpets, it would be a quick-and-easy sale, but she decides to go big on the renovations instead. She takes out a rather large loan to reconfigure the home’s entire layout. After the walls come down and the dust settles, our flipper discovers that her extensive demolition didn't add much to the value after all. All that unnecessary work took time, a time during which she was paying those double-digit interest rates and this cost her several thousand dollars.

• The Designer: Our next flipper is obsessed with clean, minimal interiors and slick German appliances. Her vision for her flip is taken straight out of a Mies Van Der Rohe picture book, and again she takes out a rather large loan to bring her vision into reality. In the end, the sparse, minimal interior, Italian concrete countertops, and full picture windows didn't contribute much to the home’s final sale price. Her property sits idly on the listings for many months because her vision didn't match the expectations of most buyers. While her house sits on the market, she continues to make those hefty interest payments on her larger-than-necessary loan.

Risk less in the case of fix and flip loans by using these simple strategies:

• Consider the minimum amount of renovation needed to bring the property to a marketable standard. The HGTV'er didn't do this, and thus she took out a loan that was larger than necessary.

• Only add features that add real value. The designer might have remodeled the home in a way that was aesthetically pleasing, but not only was her vision expensive, but it also didn't mesh with the expectations of most buyers. She took out a larger-than-necessary loan but also the features she added hindered her ability to resell and therefore pay off that loan.

If you don't employ these tactics, you could end up taking out an unnecessarily large and expensive loan to finance your next flipping project.

Thursday, October 24, 2019

Spec Home Financing: Why Private Money is the Real Deal

It's doubtful that any builder has the cash in on hand to construct a spec home out thin air. Most developers need some form of capital to bring their visions into reality, and like any other form of real estate financing, there are a variety of options. When it comes to spec home financing, there are three broad classes, banks, credit lines, equity loans, and private money. When it comes to spec homes, private money is almost always your best bet.

The great recession still haunts conventional banks. Come in with a word like "speculative" attached to your application and expect a few raised eyebrows. In the case of spec homes, banks only offer loans to the most experienced developers, but there is a catch. Even if you qualify at a traditional bank, the loan they give you is based on a set percentage of the lands appraised value. Will 90 percent of a $50,000 plot cover the cost of constructing a $300,000 home? Probably not.

Credit lines are another option, but qualifying for a $300,000 line of credit is no easy feat. Another option might be leveraging your personal assets to finance your next project. Yes, you put your real house on the line to construct a home based purely on speculation. No matter how much you might believe in your project, this is not a sound idea.

None of these options are exactly great choices when it comes to financing the construction of a spec home, but never fear. Not all hope is lost.

Private money advantages when it comes to spec home financing

Private money usually refers to individual investors or lenders who act more like investors in the upside potential of your property (i.e., hard money). Private money offers an advantage over banks in that the loan terms are flexible, as draw schedules and interest rates are up for negotiation. But above all, these lenders are willing to offer funds as a percentage of a home’s projected value, which means your loan can actually cover the cost of construction. Private money might be more expensive than a home equity loan, but putting your actual house on the line to build a house on speculation is not a very sound strategy.

However, private lenders don't just give money away. These are individuals or groups with their own interests, and you will have to prove to them that your project is worthwhile.

Tactics to increase eligibility for spec home financing

You need to convince private investors and lenders to get on board with your project. Below are some excellent strategies for increasing your eligibility for a hard money loan:

• Plan to develop an improved lot. It's going to be hard to convince a seasoned investor to get on board if you intend to build an architectural gem in the middle of a desert landscape, a la Frank Lloyd Wright. Plan to develop your project on land that comes pre-connected to water, sewer lines, thoroughfares, and the basic conveniences of modern life. Building on land in an urban area assures private investors that your property will sell quickly.

• Plan a project that can be finished quickly. Private lenders and investors don't want to wait out a plodding construction project. Investors want to get a return, ideally as soon as possible, so have a clear plan to build your spec home with construction preferably lasting no more than six months. The shorter the timeline, the more imminent the promised return and the more likely you'll be able to get private investors and lenders on board.

• Develop a story: convince investors of the possibility involved with your spec home project. Spec homes are called spec homes because they are constructed based on speculation, after all. Your speculations should be based on market realities and not pure fantasy. Research patterns of supply and demand in the immediate area. Say a university campus is expanding in an area with limited apartment availability and you plan to build low-cost housing for students. Citing real market trends like these will help convince private investors your project is worthwhile.

Using specific details like these will help convince private investors and lenders alike to get on board. With private money, you can get your spec home off the drawing board and into reality.

Wednesday, October 23, 2019

Construction Loans: The Dangers of Going Off-Budget

Construction loans present a risk to both borrowers and lenders. As a borrower, you don't have any assurance that your project will go according to plan and your lender has nothing to fall back on besides a hole in the ground and the sky above it if you default. For these reasons, construction financing is distributed piecemeal in the form of draws as construction proceeds.

The draw process has all sorts of exciting risk factors to building projects, the main one being that you have to have a plan and stick to it.

Because construction financing is given out in stages, you as a borrower need to do everything in your power not to divert from your initial budget. Any diversion on your part and you might not have enough money to finish your project. If you don't stick to your budget, disaster might be around the corner, as the following purely hypothetical scenario will clearly illustrate.

What not to do when it comes to construction loans

Our borrower is in the middle of building his dream home: a glass box perched over a beach. He's had a clear budget thus far, but he feels the initial 5 x 5, floor-to-ceiling windows won't adequately capture the view, so he orders, new 20 x 5 windows which have to be shipped from Italy and cost $20,000 apiece. No matter; he ignores the pleas of his grumbling architect who now has to reframe that whole section of the house to accommodate the new windows. "There's enough in the budget this month," the borrower says, and he is right about that, to a point.

Construction proceeds over the next few months as only a bit of minor work is needed, but then, sure enough when it comes time to install the drywall, our poor builder can't afford the cost of installation.

He asks his lender to increase his loan balance because he just needed to have those new windows, but it's safe to say the lender rejects his request for more money. Work ceases on his glass villa. Until he can get another loan, the house will remain empty and unfinished. Worse yet, he's still on the hook to pay the loan for his unfinished dream home.

The best way to risk less when it comes to construction loans is to stick to your budget.

The above story may seem far-fetched, but such situations are not uncommon. If you change your mind on a whim in the middle of construction, you can run out of money and your lender might not agree to give you more.

Do yourself a favor and have a plan and stick to it, unlike our hypothetical builder. Cost overruns are inevitable in any construction project. Most reasonable lenders are willing to work out some contingency if an unforeseen expense comes up, but few lenders are going to give you more money just because changed your mind on a whim. Staying as close to budget as possible is the best possible way to ensure you will have the funds needed to complete your construction project.

Tuesday, October 22, 2019

Bridge Loans: Fueling the Costs of 1031 Exchanges

1031 exchanges allow you to defer the payment of capital gains taxes by reinvesting your profits into another similar investment. Most industries lost out due to last year's tax overhaul, but not the real estate industry. Real estate investors can still indefinitely defer payment of income taxes on profits earned from their ventures so long as they roll those profits into the purchase of another investment property. But, there is a deadline you have to meet to qualify. If you need financing to purchase your next investment property, you might want to think twice about going to the bank. Learn why bridge loans are perhaps the best way to finance 1031 exchanges.

1031 exchanges are IRS policies and therefore regulated by perhaps thousands and thousands of opaque guidelines. For this article we are only going to focus on one: You have to secure the purchase of your next investment property within 120 days for your next purchase to qualify as a 1031 exchange.

With Bridge Loans you risk less when it comes to 1031 exchanges

Going to the bank could cost you dearly when it comes to 1031 exchanges. Remember that you only have 120 days to close on your next investment property. Day by day you lose assurance that you'll be able to acquire your new investment property on time.

For example, if you are an active investor in single-family homes and your recent sale just closed, you might consider investing in a small apartment complex. Of course, the sale of a house isn't going to cover the cost of purchasing an apartment complex, so you need financing.

You go to the bank, and the loan officer points out your lack of experience in this area. They ask for more documentation. Days plod by, documents pile up, and sure enough, the 120-day window closes. Now, you are on the hook to the IRS.

If the 120-day window passes, you will have to pay capital gains taxes on the profits you earned from that last resale. Depending on your earnings, this could end up being a significant expense.

If you need financing to secure the purchase of your next investment property to complete a 1031 exchange, spare yourself the worry and the hassle and go to a bridge lender instead.

Bridge loans offer real estate investors the flexibility and certainty needed to complete 1031 exchanges.

• Certainty: Bridge lenders underwrite their loans based on the value of the property you want to purchase, which simplifies the application process. When it comes to bridge lenders, loans can close in as little as a week, well within the 120-day time limit imposed by the IRS.

• Flexibility: Bridge financing is just that: a "bridge" between the initial purchase of an investment property and its eventual refinancing. You secure funding from a bridge lender, purchase your next property, complete the 1031 transaction on time, and then refinance to a cheaper permanent loan.

Banks aren't going to move any faster just because you have a critical deadline, and when it comes to 1031 exchanges, going to a bank could cost you dearly, so approach a bridge lender instead.