Investing in real estate has become one of the more prevalent means of investing in recent years. In particular, buying run-down properties to fix up and either sell or rent can be a great option if you’re looking to see a return on your investment sooner. But before you grab your tool belt and start knocking down walls, it’s important to have a firm foundation. In this case, we’re not talking about the foundation of the property, but instead, we mean the foundation of your investment. Finding the right financing is a vital step to any real estate investing. The financial decisions you make at the very beginning will have a major impact on the profits you see once the property is ready to sell or rent out.
First, if you’re new to flipping houses or any type of property investing, understand that there are different types of financing for a reason. Even if you’re qualified for a traditional mortgage, the terms may not be ideal for the scope of your project. For example, if the property needs a major overhaul, it’s important to consider how you’ll fund the materials and skilled labor. Traditional mortgage lenders will only offer loans a bit above the cost of the property, so you’ll need to start by getting a well-informed estimate of cost for all the work you intend to do. Anything more than some smaller renovations probably won’t be covered by a traditional loan. If that’s the case, you’ll need to take out a second loan or pay for the work out of your own savings. Instead of all that hassle, start with a loan made for flipping houses: a hard money loan.
Hard Money Loans
There are plenty of reasons that a hard money loan is beneficial for property investing. We’ve shared a few blog posts on this in the past, so we won’t rehash all of those reasons now. The quick summary is that hard money lenders look for different qualifications and offer different terms, so a hard money loan provides the flexibility property investors need for a variety of projects. The differences also mean that the application process for hard money isn’t the same as the traditional mortgage application process. Here’s what you need to know about the process:
Start With The Property
With a traditional mortgage application, the first step is generally to gather all your financial information for the lender to review. With a hard money loan, on the other hand, the first step is generally to find a property. In fact, most hard money lenders will want to know about the location, cost, and anticipated rehabbing expenses for the property before they ask about your credit history. The big difference is that hard money loans use the property itself as collateral, so the loan application can be processed far more quickly than a traditional mortgage.
Once you’ve found a property and estimated the renovation costs, you’ll need to select a hard money lender and submit an initial application. Generally, this is a fast process designed to give you a quick answer. The application probably won’t even ask many (or any) questions about your finances. All hard money lenders need to know for that initial approval is the basic information about your project. They’ll need to know where the property is located, the size and type, how much it will cost upfront, how much renovations will cost, and the anticipated value after repairs. If the hard money lenders are interested after reviewing that information, they can give you an initial yes as quickly as five or ten minutes later. If they’re not interested, you’ll need to go back to the drawing board.
When the initial application gets the green light, you’ll need to submit a full application and pay the application fee. This is the application you’ll need your financial details for. However, since hard money lenders rely on the property as collateral, you won’t need to get nearly as in-depth as you would on a traditional mortgage. Hard money loans are designed to process quickly, so even if you’re purchasing a foreclosure or bidding for a home up for auction, you can get a proof of funds letter far more quickly than you would with a traditional loan — usually in a matter of hours or days, not weeks or months. Once the full application has been reviewed, you will be pre-approved or they will ask for further documentation.
Documentation & Closing
Once you’ve been pre-approved, your hard money lender will issue a proof of funds letter so you can purchase the property. From there, all that’s left is to submit the signed purchase contract and other necessary closing documents. This list includes things like the proof of inspection, renovation proposal, and so on. After all the required documents have been submitted, your hard money lenders will review it and provide you with a good faith estimate and a letter of engagement. From there, set up property insurance, and then all that’s left is to close on the property and get renovating!
Developing a relationship with a trusted hard money lender can make the financing process go smoothly. If you’re preparing to get into property investing in Denver or anywhere across Colorado, the TABS, LLC team is here to help. Submit an initial application online, or give us a call to discuss your project and we can walk you through the steps needed for financing so you can get started today!