Have you ever wanted to start a rehab project but lacked the financial means to do so? You can get an investment property loan to help you out in this situation. Some of the available investment property loans don’t even necessarily require you to make a down payment. In this week’s article we will talk about owner financing, hard money lenders and private lending to show you how to finance a rehab project without the use of your own money.
If you’re struggling to get a mortgage loan from a bank, owner financing might be the perfect solution for you. You pay the owner a certain amount of money each month, in return for the use of his property. It’s like a mortgage loan but instead of using a bank, it’s setup with a private person.
The good thing about these types of deals is that loan requirements can be negotiated between both parties. Your negotiation skills will determine the monthly required payment and other conditions. You might even be able to find somebody in your family, willing to setup a good deal without any down payments.
It is highly advisable to only use owner financing when the mortgage on the house is fully paid off by the owner. Otherwise the bank still has the right to foreclose the house in certain situations.
With hard money lending you’re dealing with a professional investor or company that makes its money primarily by providing loans. This means higher interest rates and less negotiation space on loan terms. These loans generally have a duration of 1 year with the possibility of extension for up to about 5 years generally.
The hard money loan is mostly based on the value of the property that the loan is provided for. Down payments aren’t always required and you can get this type of loan for almost all available types of properties. However, most hard money lender would prefer that you have your skin in the game. They may only lend you up to 65% of ARV (After Repair Value) of the property. If your As-Is property cost is $150K, your estimated repair is $50K and the ARV is $270K, the loan would be $175K. You will have to find funding to make up the different of $25K + closing cost, which you maybe able to do with private lending discussing in the next section.
Hard money lenders usually charge an interest rate of about 8 to 15%. An income check or credit reference check isn’t necessary in most cases. Because the cost of the loan is on the high side, you better have a good plan ready and know exactly what the timeframe of your project will be.
Similar to hard money lenders, most private lenders want to be able to gain access to collateral when things go wrong. This can include but isn’t limited to real estate. Private lenders usually have a lot less demands than most banks have.
If you’re self-employed you might have trouble getting a loan from a bank because you don’t have a steady fixed income. In this case, private lending makes sense because private lenders don’t care too much about your income.
A loan from a private lender is very similar to that of a hard money lender but with a few important differences. Every individual with money to spare can do private lending. You can find private lenders among your own family or people you know.
Private lenders do not actively advertise their business or search for lenders and these types of loans can sometimes happen occasionally. Lending conditions and potential down payments are agreed upon after negotiation.