A mortgage loan professional starting in 1997 and a licensed real estate broker today, it should come as no surprise I am a huge proponent of real estate. Using lease options, land contracts and traditional financing, I have personally experienced the joys of home ownership, building (and losing) equity and, in inaugurating many into the club, have also shared this joy with others.
For many others, getting started is no easy undertaking, starting with financing, especially when it comes to using conventional, FHA/VA or similar institutional financing. The three C’s of credit (character, capital and capacity, not necessarily in that order) requires would be home owners (investors) submit to an increasingly thorough examination of DTI, employment history, credit use…that read like lions, tigers and bears, right? Yes, not only can it be brutal, but also an exercise in futility for many, especially the non-owner occupied type.
Enter hard (and private) money, which mostly and sometimes only cares about the property…what it is or will be worth in the future in comparison to how much it’s selling for today, that is. They don’t call it hard money for nothing, as the cost and fees (double-digit interest rates when owner-occupied is in the low single digits, 4% of the loan amount, application fees) associated with this strategy can hurt yet, so can a vaccine when you tense up in anticipation. Right? But when in the hands of a learned professional, look away and, not only do you barely feel a thing, it’s all better in no time, except for when you get sick from it, but I digress.
Take the median home, $240k in the Colorado Springs market. Being short-term financing (3 – 12 months, max), held for 12 months the total interest at 14% is $33,600. Add 4% in points and 10% in holding costs, and the cost is an admittedly hurtful $100,800 AKA a real kick in the pants. You might ask, what logical investor would want to pay $100,800 in fees and costs to acquire a $240,000 asset? One who understands the time value of money, that’s who.
You’ll need to look at this differently to understand. But first, let me take this opportunity to mention the most important factor here is the need to be working with a motivated (unemployed, bank, divorced, estate, probate) seller because it won’t work otherwise. What hasn’t been mentioned is this asset was purchased for say, 70 cents on the dollar ($156k) or less. I also left out the part that factors a shorter holding time, say 3 months or just enough time to rehab the property at a cost of about 10% of purchase price say, $16k. Effectively cutting time and fees by 75%, we now have a cost of funds equal to roughly $41,200 including rehab. Get the picture? We “just purchased” a $240,ooo asset for $156,000, added $41,200 in costs and fees and came up with an “investment” of $197k, theoretically netting $43,000 in three months. What’s so hard about that? By the way, and where the intrinsic value is different from that of a non-owner occupied investor, any home owner who has looked at a truth in lending statement as they were called will say, “what a deal” as they look at the total interest paid during the life of a 30 year loan, even at 4%!
Of course, the process, including costs and fees has been simplified tremendously but the scenario is real and it works.
Interested in getting started? With our experience and relationship with lenders at every spectrum, including hard money financing at up to 100% of ARV (after repaired value), we are uniquely qualified to you invest in real estate. Just use the contact form in the lower right to get started.