Skip to content

Tag Archives: How to Choose the Right Exit Strategy

4 Ways to Ensure Your Hard Money Loan Closes Quickly

4 Ways to Ensure Your Hard Money Loan Closes Quickly

A hard money loan can be a good option for a variety of reasons. For example, if you’re having trouble getting a loan from a bank with the terms you need, you need quick approvals and/or funding, you’re looking for tailored loan solutions, and/or you don’t want to bring in an equity partner.

Now, let’s talk about what you should know before looking for a hard money loan, and ways you can ensure a quick and easy loan process.

Quick loan application for construction funding

Know which loan type is right for you.

You can get a hard money loan on most property types, including single-family homes, multi-family, commercial, land, and industrial.

Some lenders specialize in just one or two loan categories; therefore, we recommend asking lenders upfront about what property types they are willing and able to fund. Most hard money lenders will not lend on owner-occupied properties, for instance, because of extra rules and regulations. This means lenders may not fulfill your loan request if you plan to reside in the property.

It’s also important to understand which loan type is best for your project. If you’re looking for a loan to assist with the purchase of development-ready raw land or for improvements to existing buildings or infrastructure, an acquisition and development (A&D) loan would be best. For raw land that needs to be made construction-ready, or for soft costs and entitlements, you should seek a land development loan. Construction loans are best when you’re looking to cover the cost of building various real estate projects. The recommended loan for major renovations to your property is a redevelopment/heavy rehab loan.

Understand hard money loan interest rates and points.

Most lenders charge both interest and upfront or exit points on the loan. You can expect bank loan points to range from 2 to 10 percent of the total loan amount; the exact cost depends on your specific situation as the borrower as well as the lender’s guidelines.

Compared to a bank, hard money lenders take on more financial risk with the loans they originate. Due to this increased risk, private money interest rates are often higher. This means that hard money lenders may be more expensive than banks; interest rates for hard money loans range from 9 to 18 percent. These rates will vary depending on the lender and region in which you’re operating.

It’s important to remember, however, that while hard money loans may be more expensive than a bank, they are less expensive than bringing in a new equity partner. In many situations, an equity partner can take upwards of 50 percent of the profit, which is well above a lender’s interest rate.

Calculate your Loan-to-Value (LTV) ratio

calculating loan to value ratio

A loan-to-value (LTV) ratio is what lenders use to determine the risk they’re taking on. You can calculate your LTV by dividing the loan amount by the value of the asset, and then multiplying by 100.

LTV = (Amount owed on the loan ÷ Appraised value of asset) × 100

Most hard money lenders will lend up to around 65% LTV or property value. There are some lenders, however, that will lend on after repair value (ARV) which is the estimated value of the property after it has been improved. This could increase your interest rate and/or points because it also increases the lender’s risk on the loan.

Be prepared with the necessary documentation.

Most hard money lenders are more concerned with the amount of equity you have in the property, versus, let’s say, your credit score. Lenders focus on the equity and property value as a whole.

Hard money lenders are also concerned with how you ultimately intend to pay off the loan. Be prepared to provide lenders with your exit strategy.  We recommend having a few backup plans that could be easily implemented if needed.

Banks typically want a large amount of documentation and paperwork. Hard money lenders, on the other hand, usually require much lighter documentation.

So, what types of documents are needed? Documents include, but are not limited to:

  • Loan application
  • Purchase contract
    • As with any type of loan, a Purchase and Sale Agreement is required. If the property is being refinanced, a payoff statement showing the outstanding loan balance can be required.
  • Preliminary title report
    • To show a clear title to the property.
  • Credit report
    • Impacts whether you’re approved and the rates and terms you will receive.
  • Most recent tax returns
    • Proof of funds to ensure your debt-to-income ratio remains below a certain level.
  • Proof of insurance
    • For any property being purchased or refinanced.

For construction/development loans, lenders would also need:

  • Itemized budget
  • Building permits
  • Building plans, specs, and architectural renderings
  • Name of the licensed contractor
  • Contractor agreement inclusive of a completion guarantee

Hopefully, this article has prepared you with the knowledge and confidence needed to consider a hard money loan to fund your next project quickly and efficiently. Higher interest rates may seem overwhelming at first, but the benefits of flexible loan structures, higher LTVs, and getting a loan funded quickly can far outweigh the extra cost.

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.

Broadmark Realty Capital lends in Denver, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., and Wyoming.

Top 4 Hard Money Exit Strategies

No successful investor enters the market without forming an efficient business plan – and having an exit strategy in mind before purchasing any investment property is a key part of that plan.

What is an Exit strategy?

As the name suggests, a real estate exit strategy is a plan in which the investor intends to remove themselves from a real estate investment. Essentially, an exit strategy is a plan for how to exit or reduce one situation (or liability) for a better situation (or liability).  Investors often fail to realize the importance of an exit strategy which in turn can lead to reduced profits and increased risks.

How to Choose the Right Exit Strategy

There are many elements to consider when planning an exit strategy, all of which can greatly affect the potential profitability of a deal.  The following factors are critical for every investor to consider when planning an exit strategy:

  • Short and long-term goals
  • Experience level
  • Time to close
  • Purchase price
  • Terms
  • Property value
  • Condition of property
  • Supply and demand
  • Location of the property

Understanding each of these factors will help determine which exit strategy an investor should choose, and will ultimately determine how successful their real estate investing career will be.

Top 4 Exit Strategies

There are countless ways to make money in real estate, but below are four main exit strategies most commonly used by investors of real estate to realize capital appreciation and cash flow opportunities:

  1. Build and Sell
    Build and Sell is the most traditional exit strategy for investors looking to acquire land, either a raw or developed lot, contract a building on it, and then sell the completed units. The investor’s goal is  to build units on the property which can be sold individually as single-family homes or townhomes, therein maximizing their profits at the time of sale
  2. Build and Hold
    Buy and Hold is a popular exit strategy for investors looking to hold onto a property. While they are interested in raising the net operating income (NOI) from the property as high as possible, they are more interested in generating  a steady monthly income over a long period. Investors interested in using this strategy are looking for safe, low-risk properties that will offer a stable NOI. They expect to make a profit over a long timeframe through appreciation and property management.
  3. Flipping
    Flipping, also commonly known as rehabbing, allows for high profit margins as it allows an investor to purchase property below market value, quickly renovate  and re-tenant the property. To be successful, they will need to make sure the property is in a market with high demand, have a reliable team of contractors available that can stay at or below the target budget for renovations, and then sell the property quickly.Some investors prefer to find investments that have “easy fixes” such as properties that are undermanaged. Their goal is to increase the net operating income by increasing tenant occupancy, raising the rent, and then selling the property for a lower cap rate , making a profit in the process.
  4. Wholesaling
    Wholesaling is a great way to get started in real estate investing. Essentially, the real estate investor acts as the middleman between a seller and buyer. Wholesalers never need to have ownership of the property – just the rights to purchase it. They can either sell or “assign” their purchase contract to the buyer, or they can close on the property and immediately resell it to another investor in the form of a “double close.’

A couple of Insider Tips…

  1. Have three exit strategies in mind. The first strategy should be a “best case scenario” designed to maximize profits, with a back up plan that can be implemented quickly to compensate for expense overruns or other unforeseeable issues. It’s always important to have a “last ditch” plan in mind that is designed to allow an investor to quickly exit a deal with minimal to no loss in profit.
  2. If a “take-out lender” is involved in the transaction, make sure there is a mutual understanding of their expectations prior to finalizing the deal. Take-out lenders can collect mortgage payments, interest, a portion of the rental profits and at the time of sale, they can receive a percentage of the difference between the sales price and cost of construction.

What’s the best exit strategy? Well, it all depends on your goals. Take time to research all your options so you can ensure you make the right choice for you and your market. Have questions? Contact one our lending experts today.