Here's a simple principle that I follow. Stay in my own playground. You are less likely to be hustled on your own turf. You can learn the players and the layout. If the players aren't from your playground, be cautious.
I have been a real estate investor for three decades. There are certain people that have been very good to have in my network. We will look at what I consider the most important relationship, the private money/hard money lender.
First, decide what type of investing you plan to do. This will help in establishing the correct lender. FIND YOUR FUNDING.
Today, I will concentrate on Fix-n-Flips financing.
Before you ever look at a property, y first suggestion is FIND YOUR FUNDING.
Unless you are a cash buyer, you need funds to buy property. In most cases, you will need a good relationship with a Hard Money or Private lender. I always say it's not Hard Money, because it should be easy money to acquire. If the process is difficult, you need another lender.
The best Hard Money lender will be local. In today's real estate market, good deals are only available for a day or so. Which is rule 2 Good Deals Don't Stay Hidden! If your lender needs several days to make a decision, then the best deals will always go to someone who made an offer while you were chasing money.
A local hard money lender will know the value of property in his/her market. The decision to lend can be made in hours, not days. Which leads to a question, Why can the hard money lender make a decision so fast? The property is the main underwriting factor. The lender is determining the current market value and then basing the loan amount on a discount of that value. For example, if the lender determines the property is worth $100,000, the lender will lend 60% to 80% of the value. A hard money lender's primary concern is the resale value of the property if there is default. My lender always says, "I never want to foreclose, but if I do, then I want to sell it the day after foreclosure for the amount of outstanding principal." Simply put, the lender doesn't want to over lend in case the market declines in the future.
So does this mean the private lender or hard money lender doesn't underwrite the borrower? Sorta, true. My lender pulls a credit check once a year, but there isn't a review of income. Which is good, since my income varies greatly each month.
Find a private lender in your marketplace. Meet with the lender before you start looking for any property.
Here are the questions to ask:
How do you make a decision to lend? You want a lender that can make a very fast decision. If the process requires an outside appraisal, move on to another lender.
What types of property do you lend? The lender appetite needs to match your investment plans. Stay in your comfort zone and let the lender stay in his/her comfort zone.
What are the underwriting requirements? If the lender needs tax returns, proof of income and lots of other paperwork, then move on to another lender. The underwriting should be focused primarily on the property, not the borrower.
What is the lender's normal loan size? Some private lenders will not handle small transactions. A typical cut off point is $100,000 as the loan minimum. Other lenders only want larger transactions like $300,000 or greater. Make sure the lender is on the same wavelength as you.
You may notice that loan terms have not been one of the first questions. It shouldn't be. You should structure your deal so that the lender's interest and other terms are a cost but not the determining cost in buying a property.
Local hard money lenders typically have a standard interest rate, term and origination fee. The rate doesn't vary, the term doesn't vary and the origination fee doesn't vary, no matter who the borrower is or what the property is. I know the terms, so I look for deals that are profitable for me within those terms.
What are the terms that I pay? 13% interest only note with a 2% origination and 18 month balloon. That's what my lender has provided for the last 8 years. Is it expensive, not to me. Have I seen better terms? Sure, some as low as 6%, but those lenders aren't around for long. Here's why I stick with my lender. He always delivers. My lender always has funds for me. His decision is made in an hour or two. We close in a couple of weeks. Once, I asked him if I should shop my deal around. He said, sure, but do it after the closing. If I find a better rate, refinance after the closing. Since my properties are typically fix and flips, the spread in interest is a pretty low dollar amount. I am in and out of the property in 90 to 120 days, so I don't typically seek a refinance.
The problem he said is borrowers that want to shop before the closing. Those are the people that find themselves with a deal and no funding. I can't stress this enough, either you can chase funding or chase deals in real estate, but not both. When you spend your time trying to find a lower interest rate, or lower origination fee; the great deal you want is snatched up by someone else.
Time is the enemy in real estate. You make your money in real estate when you buy the property. That concept means if you bought it right, it will be profitable. Keep your margins high.
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