What I Wish I Knew When I Chose My Hard Money Lender
Flipping houses is an acquired skill that takes time to develop. When you first begin, there are many challenges to overcome, and you have a lot to learn about the craft. One of the first obstacles to overcome is securing the capital to fuel your investments. Many successful real estate investors find the funding they need through hard money lenders. Of course, every lender is different, and there are a lot of variables to consider, besides the obvious ones such as differences in interest rates and points.
Too often, new investors pick the wrong hard money lender. Here are the 3 things we’d tell every new investor to look for in a hard money lender:
Look for a Hard Money Lender Who Offers Loans up to 70% ARV
One of the most useful metrics to find out the value and profit potential of a property is the ARV, or After Repair Value. It helps us to estimate how much a property will be worth once all rehab has been completed on the property. ARV is calculated by estimating the amount of rehab that will be put on the property, and by doing a sale comparison on similar properties in the same neighborhood once the appraisal of the property has been completed.
The standard maximum percentage that hard money lender are willing to fund is 70% of a property’s ARV. Anything higher than that is considered too risky. On average though, most hard money lenders are only willing to offer up to 60-65% ARV (or even lower with new investors).
A big reason why deals fail is a lack of capital, which is why you want to make sure that you have as much as you need, plus an extra cash cushion to cover any unexpected expenses when doing any kind of house flipping. Unexpected expenses always happen, and gap financing can get expensive and really dig into your earnings. If you’re looking for financing (especially if you’re looking to 100% finance your investment), a hard money financing is a great option, especially if it can pay for both the house and any rehab done on it, and the best way to do that, is by having a hard money lender willing to give you a higher ARV percentage than most.
A Hard Money Loan That Can Cover 100% Of The Property AND Rehab Price
Of course, the hard money lender you deal with will have different requirements on the kind of property they are willing to fund, as well as different interest rates and points. But when you have 70% ARV, you also increase the chances you’ll be able to not only fund the property, but also any rehab you do on it. That would be a great position to be in, because otherwise you will have to find the rest of the funding elsewhere. You would have to get gap financing from a different lender, or use a business line of credit.
A Hard Money Lender With Extensive House-Flipping Experience
Sure, having a hard money lender who is willing to give you up to 70% ARV is great, but finding one who also has tons of house flipping experience is a dream scenario. This kind of lender will be able to analyze any deal you bring, tell you whether you have something worthwhile or not. This lender will be able to help you spot and avoid potential pitfalls, accurately calculate rehab costs and give you invaluable help on every aspect of the resell process.
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