Common Myths Regarding Hard Money

There are many misconceptions regarding hard money lenders in the real estate industry today, and yet for those in the know, it continuously proves to be a real estate investor’s biggest asset. Do not be put off by the stigma surrounding the word “hard money” or by stories you’ve heard about a friend of a friend before learning more. Here are the top arguments I hear from naysayers on a continual basis and the reasons why they are simply not true!

Myth #1: Hard money is only for the desperate real estate investor.

This is the biggest myth of all. Many hard money lenders are privately funded, meaning they do not require bank financing to close a loan. Therefore, many hard money lenders can be more flexible than the bank when underwriting a loan if the deal makes sense. Hard money is great for those who are self-employed as they do not need to prove their income with a W-2, as well as immigrants, those with less than perfect credit scores, investors who work with properties that appear to be less than desirable, those investors who have reached their loan limit with their institution, and those investors who just need to close the deal fast. Hard money is for everyone!

Myth #2: Hard money loans are expensive.

While hard money loans tend to give most people “sticker shock” it is important to remember to look at the big picture. Most hard money lenders can lend a higher percentage of your project’s cost than some stringent traditional lenders, allowing you to bring less out of pocket funds to the closing table.

Hard money loans tend to have shorter repayment periods and prepayment penalty times. This means you can pay the loan off faster with less interest in total. Investor Loan Source, a national private lender, even has a one-time close feature allowing you to convert your short-term rehab project to a long-term rental without going back to the closing table. This allows you to avoid paying closing fees a second time.

In addition, because of the fast-closing times of most hard money lenders (who can often close within 10 business days or sooner) your potential for profit rises. After all – time is money. In an environment as hot as the current real estate market, the wait for a traditional bank loan can cost you opportunities.

When combining these perks your hard money loan tends to be a less expensive choice overall.

Myth #3: Hard money loans are risky.

This myth is almost laughable. Most of the time hard money lenders are lending out their own money and making a risky loan is not in anyone’s best interest. Hard money lenders often have a vast understanding of the real estate market and what is entailed for a project to be successful. It is not uncommon for lenders to be successful businesspeople who have the entrepreneurial spirit and a reputable background in real estate, investment banking, accounting, law, etc. If you choose an experienced hard money lender, this will ensure that proper due diligence and calculations are done to help determine whether an investment will be profitable for you, the borrower. They want you to be successful so that you will use them for your next real estate investment project.

Myth #4: Hard money lenders want to take your property.

Stop right there! Hard money lenders are in the lending business NOT the foreclosure business. They do not want to own your property. When a foreclosure is pursued, you can be sure it is because every other avenue was exhausted. Regardless of whether you go the traditional lending route or hard money, be sure that you understand your loan terms, have a solid exit plan in place and care apable of repaying your debt.

Truth: Hard money lenders are important resource.

Do not pass up the opportunity and benefits that come with taking out a hard money loan for your next real estate investment deal. It may make sense to use hard money based on your needs and the investment opportunity. Finding a lender you can trust is the single most important choice you can make. Looking for a hard money lender? Consider Investor Loan Source. Visit www.ils.cash to learn more.

Calculating DSCR

If you are a part of the real estate investing world, then you probably have heard that properly calculating a property’s debt to service coverage ratio (DSCR) is crucial. If you are newer to investing, you may wonder why it is so important. Lenders use this equation to determine if a rental investment property’s cash flow is enough to cover their borrower’s loan payment in addition to all re-occurring expenses. As a borrower, the DSCR can help you gauge the profitability of your project saving you time and money.

The formula is quite simple, but first you must learn another acronym, PITIA. PITIA stands for property, interest, taxes, insurance, and association (HOA). These are the most common re-occurring expenses taken into consideration by a lender.

To calculate the DSCR take your annual rental income (numerator) and divide it by the property’s annual PITIA (denominator). The result is your DSCR. Anything below a 1 means you have negative cash flow and would be an unlikely candidate for approval.

Be sure to check with your lender regarding their DSCR requirements. As a rule of thumb, shoot for a DSCR above a 1.25. Remember, the higher the number the better chance for profitability. You can also find a DSCR calculator online at https://ils.cash/resources/.