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Wednesday, December 5, 2018

Simple Strategies to risk less when it comes to Fix and Flip Loans

More and more are getting into the flipping business, look at the statistics, In 2017 207,888 single family homes and condos were flipped, the highest number of homes flipped since the pre-recession heyday of 2006. The average profit made per flip last year was 68.143 dollars. That's serious money. The recent rise in flips indicates many new people are getting into the business and its likely most of them are making use of fix and flip loans to do so. Learn some mistakes you want to avoid when it comes to financing flips.

Financing flips is in no way similar to financing a primary residence. These loans are for the short term, as no one in the flipping business plans to hold onto their property for the standard 15-30 year period. They are also expensive, and interest charged usually amounts to the double digits.

Considering the expense and the short-term nature of these loans you want to ensure that:

1. Your property can sell quickly

2. That you take out the smallest loan possible.

Consider the following as examples of what not to do in the case of fix-n-flip loans

• The HGTV'er: This flipper purchases a property that is pretty much livable, a fresh paint job and some new carpets and it would be a quick and easy sale. But the smiling heads of the property brothers float into her mind, "take out this wall, make it nice and open concept." She takes out a rather large loan to reconfigure the homes entire layout. After the walls come down and the dust settles our flipper discovers that her extensive demolition didn't add much to the value after all. All that unnecessary work took time, a time during which she was paying those double-digit interest rates and this cost her several thousand dollars.

• The Designer: Our next flipper is obsessed with clean, minimal interiors and slick German appliances. Her vision for her flip is taken straight out of a Mies Van Der Rohe picture book, and again she takes out a rather large loan to bring her vision into reality. In the end, the sparse, minimal interior, Italian concrete countertops, and full picture windows didn't contribute much to the homes final sale price. Her property sits idly on the listings for many months because her vision didn't match the expectations of most buyers. While her house sits on the market, she continues to make those hefty interest payments on her larger than necessary loan.

Risk less in the case of fix and flip loans by using the following simple strategies

• Consider the minimum amount of renovation needed to bring the property to a marketable standard. The HGTV'er didn't do this, and thus she took out a loan that was larger than necessary.

• Only add features that add real value. The designer might have remodeled the home in a way that was aesthetically pleasing but not only was her vision expensive; it also didn't mesh with the expectations of most buyers. She took out a larger than necessary loan but also the features she added hindered her ability to resell and therefore pay off that loan.

If you don't employ these tactics, you could end up taking out an unnecessarily large and expensive loan to finance your next flipping project.

Dennis Dahlber Broker Ri CEO Level 4 Funding LLC Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Spec Home Financing: Why Private Money is the Real Deal

It's doubtful that any builder has the cash in on hand to construct a spec home out thin air. Most developers need some form of capital to bring their visions into reality, and like any other form of real estate financing, there are a variety of options. When it comes to spec home financing there are three broad classes, banks, credit lines, equity loans, and private money. When it comes to spec homes, private money is almost always your best bet.

The great recession still haunts conventional banks. Come in with a word like "speculative," attached to your application and expect a few raised eyebrows. In the case of spec homes, banks only offer loans to the most experienced developers, but there is a catch. Even if you qualify at a brick and mortar bank, the loan they give you is based on a set percentage of the lands appraised value. Will 90 percent of a 50,000 dollar plot cover the cost of constructing a 300,000 dollar home? Probably not.

Credit lines are another option, but qualifying for a 300,000 dollar line of credit is no easy feat.

So another option might be leveraging your personal assets to finance your next project. Yes, you put your real house on the line to construct a home based purely on speculation. No matter how much you might believe in your project, this is not a sound idea.

None of these options are exactly great choices when it comes to financing the construction of a spec home. But never fear not all hope is lost.

Private money advantages when it comes to spec home financing

Private money usually refers to individual investors or lenders who act more like investors in the upside potential of your property (i.e., Hard money). Private money offers an advantage over banks in that the loan terms are flexible, as draw schedules, and interest rates are up for negotiation. But above all these lenders are willing to offer funds as a percentage of a homes projected value, which means your loan can actually cover the cost of construction. Private money might be more expensive than say a home equity loan, but putting your actual house on the line to build a house on speculation is not a very sound strategy.

However, private lenders don't just throw money away. These are individuals or groups with their own interests, and you will have to prove to them that your project is worthwhile.

Tactics to increase eligibility for spec home financing

You need to convince private investors and lenders to get on board with your project:

• Plan to develop an improved lot: It's going to be hard to convince a seasoned investor to get on board if you intend to build an architectural gem in the middle of a desert landscape, ala Frank Lloyd Wright. Plan to develop your project on land that comes pre-connected to water, sewer lines, thoroughfares and the basic conveniences of modern life. Building on land in an urban area assures private investors that your property will sell quickly.

• Plan a project that can be finished quickly: Private lenders and investors don't want to wait out a plodding construction project. Investors want to get a return, ideally as soon as possible, so have a clear plan to build your spec home with construction preferably lasting no more than six months. The shorter the timeline, the more imminent the promised return and the more likely you'll be able to get private investors and lenders on board.

• Develop a story: convince investors of the possibility involved with your spec home project, spec homes are called spec homes because they are constructed based on speculation after all. Your speculations should be based on market realities and not pure fantasy. Research patterns of supply and demand in the immediate area. Say a university campus is expanding in an area with limited apartment availability and you plan to build low-cost housing for students. Citing real market trends like these will help convince private investors your project is worthwhile.

Using specific details like these will help convince private investors and lenders alike to get on board. With private money, you can get your spec home off the drawing board and into reality.

Construction Loans: The Dangers of Going off Budget

Construction loans present a risk to both borrowers and lenders. As a borrower, you don't have any assurance that your project will go according to plan and your lender has nothing to fall back on besides a hole in the ground and the sky above it if you default. For these reasons construction financing is distributed piecemeal in the form of draws as construction proceeds.

The draw process has all sorts of exciting risk factors to building projects, the main one being you have to have a plan, and you have to stick to it.

Because construction financing is given out in stages, you as a borrower need to do everything in your power not to divert from your initial budget, any diversion on your part and you might not have enough money to finish your project. If you don't stick to your budget disaster might be around the corner, as the following purely hypothetical scenario will clearly illustrate.

What not to do when it comes to construction loans

Our borrower is in the middle of building his dream home, a glass box perched over a beach, he's had a clear budget thus far, but he feels the initial five by five floor to ceiling windows won't adequately capture the view. So he orders, new 20x5 windows which have to be shipped from Italy and cost 20 K apiece. No matter, he ignores the pleas of his grumbling architect who now has to reframe that whole section of the house to accommodate the new windows. "There's enough in the budget this month," and he is right about that, to a point.

Construction proceeds over the next few months as only a bit of minor work is needed, but then sure enough when it comes time to install the drywall, our poor builder can't afford the cost of installation.

He asks his lender to increase his loan balance, "but what about the budget we agreed to?" they ask him."Umm, well those windows were just so amazing, I had to have them," it's safe to say the lender rejects his request for more money. Work ceases on his glass villa. Until he can get another loan, the house will remain empty and unfinished. Worse yet he's still on the hook to pay the loan for his unfinished dream or shall we say nightmare, home.

The best way to risk less when it comes to construction loans is to stick to your budget

The above story may seem far fetched, but such situations are not uncommon. If you change your mind on a whim in the middle of construction, you can run out of money and your lender might not agree to give you more.

Do yourself a favor and have a plan and stick to it, unlike our hypothetical builder. No doubt cost overruns are an inevitable in any construction project. Most reasonable lenders are willing to work out some contingency if an unforeseen expense comes up. But few lenders are going to give you more money just because changed your mind on a whim. Staying as close to budget as possible is the best possible way to ensure you will have the funds needed to complete your construction project.

Bridge Loans: Fueling the costs of 1031 exchanges

1031 exchanges allow you to defer the payment of capital gains taxes, by reinvesting your profits into another similar investment. Most industries lost out due to last year's tax overhaul, but not the real estate industry. Real estate investors can still indefinitely defer payment of income taxes on profits earned from their ventures so long as they roll those profits into the purchase of another investment property. But there is a deadline you have to meet to qualify. If you need financing to purchase your next investment property, you might want to think twice about going to the bank. Learn why bridge loans are perhaps the best way to finance 1031 exchanges.

1031 exchanges are IRS policies and therefore regulated by perhaps thousands and thousands of opaque guidelines. For this article we are only going to focus on one:

You have to secure the purchase of your next investment property within 120 days for your next purchase to qualify as a 1031 exchange.

With Bridge Loans you risk less when it comes to 1031 exchanges

Going to the bank could cost you dearly when it comes to 1031 exchanges. Remember you only have 120 days to close on your next investment property. Imagine the noise from the TV show "24,"going off in the background as you try to secure financing for your next purchase. Day by day you lose assurance that you'll be able to acquire your new investment property on time.

For example, if you an active investor in single-family homes and your recent sale just closed, you might consider investing in a small apartment complex. Of course, the sale of a house isn't going to cover the cost of purchasing an apartment complex, so you need financing.

You go to the bank, and the loan officer points out your lack of experience in this area, they ask for more documentation. Days plod by, documents pile up, and sure enough, the 120-day window closes, and now you are on the hook to the IRS.

If the 120-day window passes, you will have to pay capital gains taxes on the profits you earned from that last resale. Depending on your earnings this could end up being a significant expense.

If you need financing to secure the purchase of your next investment property to complete a 1031 exchange, spare yourself the worry and the hassle and go to a bridge lender instead.

Bridge loans offer real estate investors the flexibility and certainty needed to complete 1031 exchanges.

• Certainty: Bridge lenders underwrite their loans based on the value of the property you want to purchase, which simplifies the application process. When it comes to bridge lenders, loans can close in as little as a week, well within the 120-day time limit imposed by the IRS.

• Flexibility: Bridge financing is just that a "bridge," between the initial purchase of an investment property and its eventual refinancing. You secure funding from a bridge lender, purchase your next property, complete the 1031 transaction on time and then refinance to a cheaper permanent loan.

Banks aren't going to move any faster just because you have a critical deadline, and when it comes to 1031 exchanges going to a bank could cost you dearly, so approach a bridge lender instead.

Hard Money Lenders: Finding the Help thats Right for You

Hard money lenders offer real estate investors the flexibility needed to finance deals that other lenders avoid like the plague. But not every lender is cut from the same cloth learn some of the traits of the ideal hard money lender, so you can find the help that's right for you.

When it comes to hard money you want to look out for hidden costs. In the case of rehab projects, sometimes the loan is given to the borrower bit by bit in the form of draws. Don't get ripped off by making interest payments on money that you haven't received yet. These hidden interest payments can cost you thousands of dollars. Seek out lenders who only charge interest on money as it is drawn if you plan to use hard money for a rehab or construction project.

If you can seek out direct hard money lenders a direct lender has more room to negotiate

A direct lender someone who already has the funds on hand to close your deal. Direct lenders raise the capital to fund their loans themselves. In contrast, indirect hard money providers, fund their loans from a pool of accredited investors. In most instances, these investors have a guaranteed rate of return on their investments. Due to this fact Indirect lenders have no wiggle room when it comes to the interest rate they can offer you.

Hard money is all about flexibility, and you want as much room to negotiate the terms of your deal as possible. Even a 1 percent reduction in interest rate could save you tens of thousands of dollars depending on the size of your loan. So seek out a direct hard money provider who has more room to negotiate the terms of your deal.

If you can seek out hard money lenders that offer you the

ability to write off interest payments on your taxes.

Say you're a regular real estate investor, perhaps throughout a given year you've rehabbed about 3 properties, taking out loans of around 300,000 at a 14 percent interest rate. In this case, throughout the year you've paid about 10,500 dollars in interest.

Would you like to write that off that very healthy sum on your taxes? Then you need to seek out a hard money provider who can provider a 1098 mortgage interest form. Not every hard money provider can do this due to inexplicable and opaque regulations far beyond the scope of this article. If you are a regular real estate investor being able to deduct your mortgage interest payments could save you thousands of dollars each year.

In short, the ideal hard money provider saves you money in the following ways:

• They don't rip you off with hidden expenses. For example, charging interest on money they haven't given to you

• They're able to save you money because they can offer you a lower interest rate

• The interest on the loans they provide can be deducted from your taxes every year.

Bridge Loans: Tactics to Increase Eligibility

If you've faced difficulty securing financing for your next commercial investment property because the property is half-occupied or it is in decrepit condition you should consider the benefits offered by bridge loans. Learn why this type of financing might be the help that's right for you and some approaches to improve your eligibility.

Conventional lenders don't like deserted or distressed properties. Not so with bridge lenders. Bridge lenders secure their loans based on a borrowers experience and the potential of a property.

Bridge financing allows real-estate investors to capture the long term and short term income potential of poorly managed properties or distressed properties. Using bridge financing an investor could purchase a half occupied apartment complex, improve its condition and increase occupancy, and once most of the units are occupied the investor can then refinance to a conventional mortgage.

These loans also benefit developers who intend to resell distressed properties. The capital given by a bridge lender allows the investor to improve a properties condition and then resell it for a tidy profit.

However, when it comes bridge lenders you need to do all in your power to prove the potential of your project and your experience as a developer.

If you can meet these basic eligibility standards when it comes to commercial bridge loans

• Net Operating Income: The annual income of your intended property must be able to cover the cost of the loan on a yearly basis, so you need to have on hand income and expense statements from the properties current owner, as well as rent rolls and current lease agreements.

• Experience: Most of these loans exceed a million dollars, so not just anyone can qualify. You need to have either a resume on hand or be able to discuss your track record of previous real estate development projects.

• Savings: Having decent savings on hand is a must. Your lender will want assurance that you can carry your loan should things not go according to plan.

• Net Worth: Along those lines, your net worth should be at least equal to the amount of money you intend to borrow. Even if you aren't pledging your personal property as collateral, these lenders want assurance that you have assets on hand to carry your loan if things go south.

• Credit: Credit is only a factor if you intend to refinance and if this is the case generally a minimum credit score of 650 is needed to qualify.

But above all else, bridge lenders are concerned with one thing, your exit strategy.

When it comes to commercial bridge loans talk up your exit strategy

Bridge financing is just that a bridge, it is designed to be paid back either through refinancing or resale, so being able to discuss your exit strategy is crucial. Consider the following talking points to assure your bridge lender about your exit strategy:

• If you plan to refinance talk up unrealized income potential: Half occupied commercial properties suffer due to low cash flow, and this means conventional lenders refuse to finance such deals. Talk up your plan to improve cash flow from the property you want to invest in, and have a clear strategy to increase occupancy either by making specific improvements or through better property management. Having a specific plan along these lines will give your prospective lender confidence that you will be able to refinance before the loan comes due.

• If you plan to resell: In this case, a bridge lender will be interested in your plan to bring the property back to marketable condition. Have a clear budget and timeline specifying the improvements you want to make, and cite comparable sales to give your lender concrete assurance that the final resale value will pay back the outstanding loan.

Talking up your exit strategy along these lines, keeping the basic eligibility standards in mind will ensure that you can take advantage of the unrealized potential of neglected or distressed properties with the help of bridge financing.