Capital is king. Credit matters. Speed and points over interest. G. Brian Davis breaks down 7 tips that real estate investors should know to make more money.
About the author: G. Brian Davis is a real estate investor who has owned dozens of investment properties over the last 15 years. He’s also the co-founder of SparkRental.com, an online resource which provides free landlord education and video series for anyone looking to build passive income from rentals.
Ever wonder why people love real estate so much as a strategy to build wealth?
Sure, there are plenty of reassuring, “emotional” reasons, such as the fact that real estate investments are tangible. You can walk up and touch your investment, physically improve it, and even live in it if need be.
But historical return averages also support real estate as an investment class. Real estate returns have outperformed equities, bonds and bills, when averaged over the last 145 years.
The best part? You don’t need to pay the entire upfront cost to buy a property yourself. You can use other people’s money for residential investment property financing –which is great, since most of us don’t have $100,000 sitting around collecting dust.
It also means that part of learning how to flip a house is learning how to finance deals quickly and reliably. Here’s exactly what new real estate investors need to know about investment property loans to get started.
Capital is king, even when using investment property financing
Just because you’re borrowing the cost of acquisition (and possibly the cost of improvements) doesn’t mean you’re off the hook for cash. Even financing with investment property loans will still require a substantial down payment.
Plan on putting down 10-30% of the purchase price, in cash. And that’s just the beginning.
When buying a home to flip, there will be closing costs, title company fees, lender fees, investment property insurance, and real estate taxes.
While hard money lenders like LendingHome can often finance 100% of the renovation costs, you’ll still need to cover the first draw yourself. As you do each phase of the renovation work, your lender will reimburse you – but you need to come up with the cash initially.
All new real estate investors should understand exactly how much it costs to flip a house, because mistakes can be expensive when working with assets worth hundreds of thousands of dollars!
Credit still matters
Hard money lenders and other sources of residential real estate investment financing put less emphasis on the borrower, and more on the collateral (the property).
But that doesn’t mean they won’t pull your credit report.
Before applying for residential investment property financing, make sure you know what the lender will find when they pull your credit. Most investment property loans set a minimum credit score, often in the 620-660 range.
If your credit is in the 500s, you may want to focus on rebuilding it before applying for investment home loans. Start by paying off your credit card debt and any other expensive unsecured debt. Make every payment on time – no exceptions!
Hard money lenders like LendingHome are far more flexible than conventional lenders on credit, but “flexible” is not the same as “anything goes.”
Choose speed & lower points over lower interest
Real estate investors often need to move fast to score good deals.
The 30-60 days that your typical conventional lender will take to underwrite and close your loan? That’s not good enough when you’re buying residential investment properties. Speed is often investors’ best selling point: “My offer may be $20,000 lower, but I can settle within the next seven days, to prevent your foreclosure.”
When you’re comparing residential real estate investment loans, many new investors look first to interest rate, because they’re used to looking at normal residential home mortgages that last for 30 years.
But investment property loans? You’re borrowing for six months to a year instead of 30 years. The difference between a 7% interest rate and a 10% interest rate just doesn’t add up to very much when you’re only making payments up to a year.
In comparing pricing, look closer at lender fees and closing costs – that’s where the real cost differences lie.
And most importantly, find out how quickly the lender can close the loan. Often you need to settle within one or two weeks in order to satisfy a desperate seller, so speed matters.
Speed is where hard money loans can truly shine.
Line up a lender before you need them
Imagine you find a deal: the seller is desperate and will sell for $30,000 under fair market value, if you can settle within several days.
You scramble to put the property under contract. The seller signs, and the clock starts ticking.
At that point, the last question you want to ask is, “Where am I going to come up with the money?”
Instead, make sure you have an investment property mortgage lender in mind before running around putting homes under contract. It’s your job as a house flipper to make sure you know exactly how you’ll fund deals, before putting them under contract.
That means talking to lenders, understanding their residential hard money loan requirements, and making sure their loan terms fit your needs. Call them up, make sure they offer the kind of investment property financing you need.
Build relationships with lenders
Lenders of any kind base their loans and pricing on risk. Higher-risk borrowers can expect to pay higher costs.
How do you lower your risk in the eyes of lenders?
You start by establishing trust. By building a relationship where you repeatedly work with the same lender and create a track record of on-time payments,on-time payoffs, and successful exits, trust is gained and it begins to open up options
In fact, building relationships with lenders should be part of your larger plan for building your network as a real estate investor. The more relationships you have, the more money you’ll make as a real estate investor. Lenders like LendingHome offers vanishing points for repeat borrowers, meaning that they lower the origination fee each additional time the borrower works with them.
Have an exit strategy & contingency plans
Most house flippers simply sell their properties once renovations are complete. Their exit strategy is selling through a realtor, in most cases.
But what happens if the property doesn’t sell? If it sits on the market for three, four, five months?
As a real estate investor, that’s cause to sweat. The soft costs of owning investment properties start racking up quickly.
What’s your contingency plan? Lower the asking price? Offer seller concessions? Add more amenities?
Or you could shift gears and refinance the property and keep it as a rental, if the cash flow numbers make sense.
Regardless, you need a clear exit strategy with several contingencies. Residential investment property financing, at least for flips, is short-term financing, and is designed to turn over quickly.
Once again, speed matters, not just when you go to buy, but also in renovating, marketing, selling, and refinancing to pay off your investment property mortgage quickly.
Plan your real estate investment financing before anything else
Unless you’re planning to buy in cash, you need residential investment property financing, and you’ll probably need it quickly when a deal comes along.
What lender will you use? How much cash will you need to put into the deal? Do you meet the lender’s requirements? What contingencies are in place to make sure you can pay off the bridge loan on time?
Your ability to invest in real estate is entirely based on your ability to come up with money. Before you spend weeks or months finding a good deal on a flip, the first question you need to answer about your next deal is simply: “How will I fund it?”
If you present strong deals and a decisive plan of action, you’ll find that lenders will want to work with you on real estate investment financing. No matter who you use to finance your investment property, make sure you have a reliable plan in place for funding, before your deal is under contract and the clock starts ticking!
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