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Little River, SC
Los Angeles, CA
How to Use Hard Money to Purchase, Rehab, and Rent Investment Homes
America is on sale, with some real estate prices down 50%, or more, in certain markets. This coupled with low interest rates, has created an unprecedented buying opportunity for investment homes. Despite this attractive environment, acquiring real estate has become expensive. Many lenders have changed underwriting guidelines due to the financial crisis, and are increasing the minimum down payments from 10% to 20%, or even higher in some cases. This leaves many would be real estate investors asking themselves the question, "How do I maximize the cash I have?" This has created a new demand for creative real estate investment financing.
Enter Bridge Financing:
Bridge financing, has many lexicons; hard money, private money, short-term capital, construction loans and more. Hard money seems to be the most common. Using hard money has become in vogue for a couple reasons; one being flexibility in deal structuring, and the second being speed and ease of acquiring it. One of the most common structures for this form of investment property financing is to purchase and renovate a home in order to hold for cash flow. This process usually involves two loans. The first being the bridge loan, or hard money loan. It is used to purchase and renovate the home, then is usually refinanced out within a short period of time (90-180 days). Upon the refinance the hard money lender is paid off and the investor is left with limited to no investment in the home. That final number depends on a number of factors including; purchase price, renovation, neighborhood, market and more.
Basic Structure of Hard Money Financing
- Investor identifies an investment home in need of renovation usually with substantial equity as most hard money lenders lend in the neighborhood of 65-70% of the After Repair Value of the home.
- Investor purchases the home with hard money, which includes purchase costs and all, or most of, repair costs
- Improvements are completed on the home through draw disbursements to a contractor
- Upon completion of improvements a refinance of the original hard money loan is initiated
- A new appraisal is ordered and an improved value (After Repair Value or ARV) is used
- The permanent lender underwrites the loan and pays off the initial financing, giving the investor favorable terms on a 30 year loan, allowing the investor to be cash flow positive on the property
Factors to Consider
This type of loan usually involves a high origination fee of between 3% and 5%, and a high interest only payment of 1% to 1.5% per month. Additionally you will pay closing costs again when loan is moved to the permanent lender. This can often cost around 10% of the equity to structure the deal in order to minimizing your out of pocket investment. Many investors would still choose this method of using other peoples' money, though, due to the ability to purchase more homes, and increase the cash on cash return.
Reverse Mortgages and Taxes
The reverse mortgage has fast become of the hottest loan investments today. Each year, more and more people are considering this type of funding for their needs because it is low cost and affordable. It also allows the homeowner to tap into the funds that they need to make payments, to fund long term care or even to help them to secure a second home. There are many ways in which this type of loan can be used. In fact, in most cases, there are no restrictions on how it can be used, as long as the home’s mortgage is paid off in full prior to the funds be used otherwise.
What about taxes? This is another benefit of the reverse mortgage. Unlike other mortgages and loans where there are fees and taxes that bring down the loan from the start, the funds that come from a reverse mortgage are not taxed income. This allows the homeowner to secure the funds that they need without having to worry about the government taking a large chunk of it.
For those that are on social security or those that have Medicare, the reverse mortgage is still a plus for many. Unlike any other source of income, the reverse mortgage will not affect their benefits. In other cases, the individual is only allowed to make a specific amount of money per year over their social security benefits. The funds from a reverse mortgage do not qualify though and therefore you benefits will not decrease if you tap into this type of funding.
If those that receive these funds will hold them past the end of the calendar month, though, the funds will be considered liquid assets. Therefore, this can harm them in their eligibility for these programs.
The amount of money that you will get from your reverse mortgage is determined in several ways. First, the home will need to have a Federal Housing Administration or Fannie Mae approved appraisal. This will determine the value of the home. It is also determined based on the starting interest rate of the loan, the fees that are involved as well as the location of the home. All of these things play into the amount of funds that can be acquired through the reverse mortgage.
When considering a reverse mortgage, homeowners will need to seek out HUD approved counseling to help them to make the right decisions for their needs. Because these mortgages are FHA backed, they can provide these services to the homeowner so that they can make the right decision.