Financing Guide: Understanding the Risk of Real Estate Investor Loans
Owning a property is one of the oldest methods of securing a monetary investment in the future. Our forefathers’ wealth was measured in how much property they owned and what businesses they could develop. In modern times, purchasing real estate continues to be a viable method of securing your wealth. This is why homebuyers are particular about the home they purchase because of the potential future return on investment the property can accumulate over time.
Financing a property investment is achieved in one of two ways, hard or soft money loans. Either option is legally viable but has different rules and guidelines, depending on your current financial situation.
Differentiating soft and hard money loans
Securing a soft money loan is the more traditional way of borrowing money. This transaction is done through banks, credit unions, and other lending institutions. With an underwriter’s approval, a borrower and lender engage in a contract that includes different loans and verities. In contrast, hard money loans are short-term bridge loans taken from private investors based on the collateral of securing the loan instead of the borrower’s ability to repay. The worst-case scenario you can experience is missing your repayment dates and sacrificing ownership of the property set as collateral. The lending entity then sells the property to pay off your current debt.
Upping the risk factor with hard money loans
The increased risk in dealing with hard money loans is that you’re under a contract with a private investor. Unlike soft money lenders, private investors aren’t under specific restrictions of how much rates and repayment dates will be for your loan amount. However, engaging in a hard money loan deal can also put you in an advantageous position. You can eventually earn additional capital based on your personal track record and repayment history if you’re maintaining a long-term commitment with a hard money lender.
Understanding your home’s hard money value
Many home buyers find great value for their real estate by flipping homes. It’s the practice of purchasing damaged property and reselling it for a greater profit once proper repairs and renovations are made. A home’s After Repair Value (ARV) has a considerable impact on what your appraisers will estimate your hard money lender to have. Generally, hard money lenders can finance up to 70% of a home’s ARV. This allows you to spend nothing close to the actual buying price while still having enough from your savings for refurbishing a property’s value.
Knowing the right time and property for a hard money loan
Like any loan option, there’s a specific time and situation that will benefit your financial dilemma. For example, soft money loans usually renovate property essentials like a roof, window, and door replacements. However, if your home requires heavy repairs known as “deferred maintenance,” an appraiser can put this figure above $2,000. This makes it impossible for you to receive a soft money loan for repair compensation. Thankfully, securing an investor for hard money loans won’t require you to empty your savings for funding the property’s refurbishing. This is why home buyers can have a profitable investment in purchasing foreclosed properties through hard money loans.
Hard money loans aren’t ideal for every real estate investment, except homeowners who frequently flip homes. Remember that every financing option has its drawbacks, especially if local state laws have to be considered. This is why a professional opinion from investment experts can give you better insight into making the right financial decisions.
It’s best to connect with investors that already know your property’s needs. At DFW Investor Lending, we can match you with hard money lenders in Dallas, Texas, to finance your real estate investments. Contact us today, and our team can also appraise your home for you!