For as long as modern commerce can be traced, real estate has always been considered to be a viable means of wealth creation. However, this is not an industry for the faint-hearted. One of the major obstacles to success in this niche amongst many others is finances. Many new investors often have the challenge of getting enough money to buy property.
People who have the knowledge about and access to mortgage and financing are able to surmount this obstacle at some point but that is not the case for a high number of newbie investors. Thankfully, however, there is an option known as hard money loans that in now available to investors in the real estate space. Although it is s a short-term financing option but if used wisely can drive tremendous success for property development and sales.
In this article therefore, we will help you gain an understanding of what this financing option is and how you can leverage it to buy houses without cash in hand so stay with us…
What Does “No Money Down” Really Mean?
Before we go fully into the discussion of hard money loans, there is a phrase that usually comes up in the property development and sales space and that is ‘no money down’. This phrase may seem to be saying that you don’t pay any money at all but that is not the case here. What this phrase means in real estate investment is that you are leveraging OPM (Other People’s Money).
So OPM in essence means you are investing little or no cash of yours but getting your capital from partners, private investors or lenders. One prime example of OPM is the financing option we are discussing in this article.
What Is a Hard Money Loan?
A hard money loan is a short-term financing option that is based on assets to be acquired and it is used mainly by investors in the real estate industry. This is different from traditional loans gotten from financial institutions based on the credit score of the borrower and their financial history. Hard money loans are more focused on the value of the property that the borrower is looking to buy; particularly, its ARV (After-repair Value). You can visit https://www.masterclass.com/ for more details on ARV.
These credit facilities are usually given by private companies or individual instead of traditional banks. They are made to be flexible and fast and this makes them suited for people that want to buy undervalued or distressed properties or house flippers.
Key Features of Hard Money Loans
Below are the major characteristics of features of these loans: –
- They are Short-Term – These loans usually last from 6 month to 3 years and they are meant to be bridge loans. This means that they are to be used to buy and renovate a property before selling it or refinancing.
- They Have Higher Interest Rates – These credit facilities often come with higher interest rates than regular mortgages; between 8 and 15%. This is because of the greater risk that the lender takes on.
- They Have Fast Approval and Disbursement of Funds- One of the main advantages of this option is that applications are approved as fast as possible and the funds made available quickly. Application approval happens in just a matter of days in most cases. This makes this option ideal for auction properties or competitive markets.
- It is Based on Collateral – The loan is usually secured by the property it was used to buy which means that the property can be foreclosed in the event of default.
- Requirement for Down Payment Varies – The down-payment requirement is usually at the discretion of the lender. It may be any from 10 to 30% or nothing. Some lenders can finance everything for a property that has appreciable equity or for investors with solid investment plans.
Click here for more information on what to expect from a hard money financing transaction and how to navigate the process.
How to Use a Hard Money Loan to Purchase a House with No Money
In this segment, we will share the basic steps for leveraging this loan option to buy houses without money: –
Step 1. Find a Suitable Property
Lenders are more likely to approve your application if the property is going for less than its rightful value and also has significant potential for renovation or appreciation therefore look out for properties in the following categories: –
- Foreclosures
- Auction properties
- Short Sales
- Run Down Homes
Bear in mind that it is the viability of the deal that determines your loan terms; you ca even get full financing for great deals.
Step 2. Build a Strong Investment Plan
Even without cash for down payment, you must of necessity have a plan that assures the lender that the investment is one that will yield significant profits. This you can achieve by presenting the following: –
- A precise and accurate estimate for repairs
- A realistic plan for refinance or resale
- Comparable sales (comps) to defend the After-sales Value
- A feasible timeline for renovation and refinance or sale
Step 3. Work with a Lender that Offers 100% Financing
There are lenders whose specialty is 100% financing for deals that qualifies. This happens more often for the following: –
- Properties that are highly discounted
- Reasonable renovation budgets
- Qualified partners or proven track records
- Plan for fast refinancing after repairs
Some lenders even include what is known as rehab loan which covers the budget for repairs.
Step 4. Use Other People’s Money (OPM) for the Down Payment
You can consider OPM for down payment. This entails partnering with friends or family, private investors or real estate investment groups if a down payment is required by your lender. This partnership can be structured in such a way that the investor brings the down payment and you do the grunt work and then you split the profit as per agreement.
Conclusion
You can actually buy a house without money and it has been proven by thousands of people through the years. The trick is to leverage existing financing plans that can help you with the niche that you have chosen to invest in.
In this article, we have discussed the basics of hard money loans. However, is not enough to just know these basics; you need to do you due diligence to further find out the pros and cons and also how to leverage this option for maximum profit.
