88
1
2
Welcome To The Glassridge…
HARD MONEY BORROWER’S
GUIDE: How To Close Faster & Get
Better Rates
Questions? Comments? Ready to Pre-Qual?
Our friendly, US-based real estate financing specialists are standing by to
assist you.
Contact Us Directly:
888-995-4544
http://glassridge.com/contact/
© 2016 Glassridge, LLC
All Rights Reserved.
3
HOW TO BEST UTILIZE THIS GUIDE
Whether you’re a total newbie investor, or a billionaire real estate mogul, we’ve
included something of value in the Hard Money Borrower’s Guide for every
investor and deal maker.
This means you’ll probably want to skip around.
The Guide covers a broad range of topics, from very basic Real Estate Investing
101, to insider’s tips & tricks on closing faster at better rates to inspire new ideas
among even seasoned real estate veterans.
To make it quick & easy to find exactly what you’re looking for, we’ve included
two robust Navigation Tools on the first pages:
The Digital Navigation Menu [pg 5]
This Navigation Menu is strictly for use when browsing this document on a
computer, tablet, or smartphone. Every individual chapter is linked to from this
digital Menu, and at the end of every chapter, you can find a link back up to the
Menu.
Hopefully this will help you jump right to the info you’re searching for as fast as
possible.
The Printable Table of Contents [pg 6 – 7]
Many of our Glassridge Insiders prefer something they can hold in their hands,
which is why this document is also 100% printer friendly.
The more traditional, printable Table of Contents will help you find the exact
page number of any specific info you’re looking for. It also provides a great
chronological overview of everything you can find within the Hard Money
Borrower’s Guide to provide at-a-glance browsing convenience.
Quick Tip: When viewing the Printable Table of Contents on a
computer, its entries function as clickable hyperlinks just like the
Digital Navigation Menu.
4
Between these two navigation tools, our hope is you’ll be able to quickly pick &
choose what you need to know, quickly find it in this document, and glean
valuable nuggets of information without actually having to read every single word
on every single page.
And of course, always remember if you have any questions, our friendly, US-
based Support Staff is here & happy to help!
Visit http://glassridge.com/contact/ to reach someone online, or dial 888-995-
4544 for immediate help.
5
NAVIGATION MENU INTRODUCTION: FROM THE CEO
REAL ESTATE INVESTING 101
REAL ESTATE FINANCING: SIMPLIFIED
MASTERING HARD MONEY
LOANS
Two Primary Ownership Strategies
Four Types Of Real Estate Financing
What Are Hard Money Loans?
Types Of Investment Properties
Profiting From Real Estate Loans
When To Use Hard Money Loans
Cash Purchase vs. Real Estate Loans
Bank Loans vs. Alternative Financing
Guarantee Your Loans Close Fast
Get The Best Possible Loan
Rates
CONCLUSION & SPECIAL OFFER
Get 25 Basis Points (BPS) off your first loan with Glassridge.
Details on the final page.
6
Table of Contents [Printable] Introduction: From The CEO .............................................. 8
Old School Broker + New School Tech ........................................... 9
The Glassridge Investor-Centric Philosophy ................................. 10
Real Estate Investing 101 .................................................... 11
TWO PRIMARY OWNERSHIP STRATEGIES................................. 12
#1.) Fix & Flip ................................................................................................. 12
#2.) Buy & Hold .............................................................................................. 16
TYPES OF INVESTMENT PROPERTIES ....................................... 20
Single Family Residences (SFRs) .................................................................. 20
Small Multi Family Properties (2 – 4 Units) .................................................. 22
Apartment Buildings (5+ Units) ..................................................................... 24
Commercial Real Estate.................................................................................. 27
Raw Land ........................................................................................................30
“Should I Diversify By Working With Different Property Types?” ................. 32
CASH PURCHASE vs. REAL ESTATE LOANS ............................... 34
Pros and Cons of an All-Cash Real Estate Purchase ....................................... 34
Pros and Cons of Real Estate Loans ............................................................... 36
Last Word: Cash or Financing? ...................................................................... 38
Real Estate Financing: Simplified ..................................... 40
FOUR TYPES OF REAL ESTATE FINANCING ............................... 41
1. Equity Investors .......................................................................................... 41
2. Bank Loans ................................................................................................. 42
3. Owner Financing ........................................................................................ 42
4. Private Hard Money Loans ......................................................................... 43
PROFITING FROM REAL ESTATE LOANS .................................... 45
Calculating Rough ROI: The Basics ................................................................ 46
The Lender’s Job Is To Loan You Money! ..................................................... 47
What Your Lender Wants To See.................................................................... 48
BANK LOANS vs. ALTERNATIVE FINANCING ............................. 52
Are Private Hard Money Lenders Worth It? .................................................. 54
Mastering Hard Money Loans ........................................... 55
WHAT ARE HARD MONEY LOANS? ............................................. 56
7
Private Lenders vs. Hard Money Lenders ...................................................... 57
The 3 Hard Money LTVs ................................................................................. 59
WHEN TO USE HARD MONEY LOANS ........................................ 62
Fix & Flip Financing ....................................................................................... 62
(Certain) Rental Property Purchases .............................................................. 63
Deals That Need To Close Fast ....................................................................... 64
Cash Out Refinancing ..................................................................................... 64
Foreign Nationals & Foreign Companies........................................................ 66
Low-Doc and No-Doc Loans ........................................................................... 66
Maxed Out Traditional Mortgages ................................................................. 67
Higher Leverage Investment Strategies ......................................................... 67
Corporations & LLCs ......................................................................................68
Partnership Buyouts & Takeovers ..................................................................68
GUARANTEE YOUR LOANS CLOSE FAST ..................................... 70
Be Accurate In Your Property Valuation Estimates ....................................... 71
Be Forthcoming In Explaining Recent Transactions ...................................... 72
Be Mindful Of Your Cost Of Capital When Shopping The Deal ..................... 74
Be Aware Of The Property’s Title Situation .................................................... 77
Be Clear About Borrower(s), Guarantor(s), And/Or Partner(s) ..................... 78
Be Honest & Candid About Your Income, Credit, And Collateral .................. 79
Be Realistic In Your Exit Strategy & Timeline ............................................... 80
GET THE BEST POSSIBLE LOAN RATES ...................................... 81
Put More Skin In The Game (Lower LTV) ...................................................... 81
Finance Bigger Deals ...................................................................................... 82
Build Your Credit Between Loans ................................................................... 82
Become A Repeat Borrower ............................................................................ 83
Actively Participate In The Borrowing Process .............................................. 83
Refer Other Borrowers To Your Lender ......................................................... 85
Conclusion & Special Offer ................................................ 87
Special Offer: Save 25 BPS On Your 1st Loan! ............................... 88
8
Img via: Jonathunder - CC-BY-SA-3.0
Introduction: From The CEO
Welcome to the Glassridge Insiders.
By taking the time to research our company and read this today, you
are taking a step toward what I hope & believe will be a game-
changing financing partner to help grow your real estate wealth.
Whether you’re a veteran real estate investor or total newbie, most of
us agree:
There is still a major disconnect between private lenders &
real estate investors.
Lenders think like bankers, fail at customer service, and tend to forget
the realities of real estate deal making on the front lines.
9
Real estate investors think like deal makers, developers, and
entrepreneurs. We stay focused on deals and positive cashflow,
managing our real estate portfolio like a business.
After standing on both sides of that table, I can say with confidence
that 9 out of 10 times, the way it works is broken.
Our goal is simple: to be the Real Estate Investor’s Lender.™
We will always think, talk, and act like real estate investors first, and
lenders second, because that’s what we are. We’re building a quicker,
easier, service-oriented real estate lending model that makes it a
breeze to close on funding for all types of real estate deals.
Old School Broker + New
School Tech We operate from a traditional, “old school” Broker perspective. Your
needs come first, and we’ll carefully match you with the ideal loan
programs to close fast on your deals at the best rates.
We research, investigate, negotiate, and drive a hard
bargain on your behalf, like an Old School Broker should.
That mentality is complemented by our new school proprietary
software platform which quickly matches Borrowers to Lenders based
on dozens of carefully selected data points. We reviewed 551 private
lenders, distilled the list to the top 176 in the USA, and hand-
categorized them based on 22 loan types & 17 special criteria to
match you with the ideal real estate financing options almost
instantly.
In other words: we can provide you the best rates & best terms faster
than anyone, whether you’re looking for Fix & Flip Financing in
Kentucky, Agricultural Loans in Oregon, or Construction Loans in
Los Angeles (or any other type of real estate investor financing).
10
We’re here to fund your future deals, and we have qualified,
dedicated, US-based financing specialists on call & ready to help grow
your real estate wealth. Reading this now, you’re taking the first step.
The Glassridge Investor-
Centric Philosophy Our universe at Glassridge revolves around you: the Real Estate
Investor.
As the Real Estate Investor’s Lender™, we obviously believe that the
experienced and determined real estate investor is the single most
important piece of the entire investing puzzle.
As a direct buyer & seller of real property, you’re where the rubber
meets the road in this industry … whether you’re a builder, developer,
flipper, landlord, manager, or any combination thereof, you’re out
there, boots on the ground, finding deals, closing transactions,
deploying resources, and creating profits.
As a real estate lender, the investor is our #1 priority, and the
deciding factor of whether or not we’ll be successful. Of course: our
Underwriters and Brokers are the best in the industry. However, at
the end of the day:
We are real estate financing FOR investors, BY investors.
Our founding team are all real estate investors ourselves; we think
like real estate investors first & foremost, and everything we do is
built around helping real estate investors succeed.
Return to Navigation Menu…
11
Img via: @thatmattwade- CC-BY-SA-3.0
Real Estate Investing 101 If you’re new to real estate investing, this chapter is the place to start.
In it, we’ll cover some of the most important fundamentals needed
before even considering borrowing private funds.
Some of those fundamentals will include:
Foundational thoughts on the two primary real estate
ownership strategies: Fix & Flip vs. Buy & Hold.
The different types of investment properties, including
some of the pros & cons specific to each property type.
12
A comparison of all-cash purchases vs. real estate
financing (including traditional & alternative finance
options).
In general, this will be a highly condensed overview of real estate
investing. There are advanced academic degrees related to real estate
investing & real estate finance, so remember that this is simply a
rough outline to help build a quick foundation.
Hopefully it will provide a basic understanding of broad strategic
principles, general property types, and some important jargon &
financial concepts necessary for comprehending real estate
investments.
TWO PRIMARY
OWNERSHIP STRATEGIES To keep things simple, we look at all real estate investment strategies
from two primary ownership objectives:
Fix & Flip vs. Buy & Hold
Below, we’ll examine each separately to put some perspective on why
we boil it down to such a simple dichotomy. Obviously, many
transactions & investment strategies will incorporate elements of
both.
#1.) Fix & Flip
The goal of any real estate Fix & Flip investment is to buy low & sell
high.
Generally, this is a short-term strategy, holding the property for about
a year or less while you add improvements and/or wait on price value
appreciation (if you’re in a super hot market).
For most Fix & Flip strategies, whether you’re looking at Single
Family Residences (SFRs), small multi-family (up to 4 units),
13
apartment buildings (5+ units), or commercial properties, you are
almost always going to need a private hard money lender for your
financing needs. Especially when it comes to SFRs and 2 to 4 unit
multiplexes, banks are rarely going to be willing to loan on an “as is”
property that needs improvements.
Based on our experience as both direct investors & lenders, the most
challenging bits of a successful Fix & Flip strategy you’ll need to keep
in mind are as follows.
Challenges Of The Fix & Flip Ownership
Strategy
1. Actually finding the deals.
This can be accomplished a variety of ways, from “We Buy Real
Estate” websites, to direct mail & yellow letters, to outbound
telemarketing, to local display advertising & even bandit signs.
On average, we’ve seen established acquisition lead generation
processes costing from $1,000 - $5,000 per transaction (at a
rate of about $50 - $250 per lead, looking at 20+ leads to find a
single hot deal).
Sourcing real estate investor acquisition leads is a specialty of
our sister company, Real Estate Virtual Assistant Services.
Check us out if you’re looking for some acquisition lead
generation help.
2. Securing the capital to close fast.
Whether you’re paying all cash, working with financial backers,
or securing real estate financing (bank or private loans), you’ll
need to have your capital ready to go.
Be mindful that different buying situations require different
14
financing. For example, some auctions require cashier’s checks
on the spot, and many “as is” properties will require a “cash
buyer” who is either self-funded or pre-approved for a hard
money loan (with a Proof of Funds letter to verify).
3. Making property improvements quick & affordably.
Most Fix & Flip scenarios involve some type of needed property
improvements, renovations, upgrades, and repairs (the “Fix”
part).
If you aren’t familiar with this type of construction & renovation
work, and don’t already have an established team you can trust,
it’s easy for a deal to go south during this stage of the game.
The clock is against you when working on property
improvements, as your funds are tied up, each property has a
real monthly hard cost to own, and (if you have financing)
you’re probably paying a monthly loan note regardless of how
fast your Contractors are finishing their work.
4. Getting the property sold.
Obviously, the last step of a successful Fix & Flip is when you
actually sell the property for a positive Return On Investment
(the “Flip” part).
Whether you’re a licensed Agent or Broker yourself, you intend
to list on the MLS with your own Broker, or you plan to go the
FSBO route… you’ll need to pick the right asking price, generate
interest in the property, show the property to potential buyers,
and ultimately close for a profit.
This can be a difficult journey, and if you don’t already either
have your own proven procedures, or a great Agent / Broker
15
you can count on, you might end up losing money in this final
stage of the Flip.
Every single element of the Fix & Flip process has its own difficulties
& nuances.
While we can definitely help you overcome some of these challenges
(especially through our sister company, Real Estate VAs), at the end
of the day your Fix & Flip system is going to need to be developed,
implemented, tested, and refined based on your own first-hand
experience doing deals.
Return to Navigation Menu…
16
Img via: CincyProject – CC-BY-2.0
#2.) Buy & Hold
The most common real estate investment strategy is Buy & Hold. The
goal here is to amass an ever improving real estate portfolio that
generates a growing stream of positive cashflow from lease & rental
income.
Whether you manage your properties yourself, or utilize a property
manager…
Whether you make your purchases in all cash, or you leverage
financing to build your portfolio…
The goal is the same: maximize cashflow, build equity, scale
up, repeat.
While of course most landlords & rent collectors would prefer to
eventually sell their property at a net gain (price appreciation), we’ll
consider that an element of the “Fix & Flip” strategy. Regardless of
price appreciation aka capital gains realized at time of sale, a pure
17
Buy & Hold strategy, focused strictly on profit from rents, comes with
its own set of challenges & risks to keep in mind.
Challenges Of The Buy & Hold Ownership
Strategy
1. Accurately managing income & expenses.
By far, the single most difficult element of building a profitable
Buy & Hold rental property portfolio is accurately forecasting
and manager your income & expenses. There are many
elements that even seasoned investors find difficult to predict,
or too easy to neglect. Collecting rents is rarely (if ever) a high
margin endeavor, so tracking, forecasting, and optimizing
cashflow is absolutely crucial to stay in the black.
Some of the more important factors to keep in mind when
forecasting rental portfolio budgets include:
o Cost of capital. How much are you spending on your
monthly mortgage or hard money loan note?
o Cost of insurance(s). You’ll need at least one or two
specific policies at the bare minimum, including
potentially:
Homeowner insurance.
Commercial insurance.
Landlord insurance.
Mortgage insurance.
General Contractor bonding & insurance.
o Cost of maintenance & repairs. While by no means a
comprehensive list, you’ll have to account for every one of
your properties’:
Roof
Foundation
Appliances
HVAC
18
Plumbing
Electrical
Landscaping
The lifecycles & replacement costs of all of the above very
tremendously, from once every 20+ years, to multiple
repairs per year. There are many resources you can look
into to help budget for these repair costs, and we’re happy
to help you run some numbers (so feel free to contact us
here for help).
2. Keeping properties maintained, occupied, and rents
paid.
Whether you have a portfolio of single family homes &
apartments, or commercial properties & agricultural land, the
objective is the same: keep the income flowing.
From tenant complaints to routine maintenance issues to
evictions, collections, bankruptcies, and deaths, managing your
properties and their lessees is real work. That’s not to mention
marketing vacancies, pre-qualifying potential renters, running
credit & background checks, getting leases signed, and receiving
& disbursing payments & deposits.
Of course you can use a property manager and/or facilities
manager to do this for you, but you’ll need to carefully select the
right match for your needs & budget accordingly.
3. Staying Informed & On Top Of Macro-Economic
Trends.
The larger & more diversified your real estate investment
portfolio, the more you’ll be affected by macro-economic trends
at both Main Street & Wall Street levels. As your rental portfolio
grows, you need to focus on real estate merely as one asset
19
class, and diversify not only your real estate holdings, but also
your overall savings allocations based on broader trends in the
global economy.
While real estate is an excellent long-term investment, and one
of the more stable assets available, it is very illiquid and still
subject to macro-economic pressures like any other asset class.
This means if you’re not careful & staying informed & on top of
the trends, you could potentially be left with a portfolio that is
suddenly looking a lot less solvent or profitable.
Ultimately, a savvy real estate investor will use a mix of each strategy:
Fix & Flip and Buy & Hold.
Indeed, every single Buy & Hold transaction has an element of Fix &
Flip within. Every time you buy real estate, ideally you’ll be able to
buy low & sell higher (even if that’s not the primary objective).
The most important factor to keep in mind are the numbers: is it
going to be a profitable investment, compared to similarly risky
opportunities for your time & capital?
If it appears to be a good ROI by your best measures, and is a better
bet than comparable investment options (stocks, bonds, etc), then
you can absolutely reap great returns with both Fix & Flip and Buy &
Hold ownership strategies. Indeed, they should play a role in every
well managed portfolio.
Return to Navigation Menu…
20
TYPES OF INVESTMENT
PROPERTIES
Img via: IvoShandor - CC-BY-SA-3.0
Single Family Residences (SFRs)
The most common type of real estate investment for beginners is a
Single Family Residence or SFR. An SFR is your typical single family
house, and can range from sub-$20k starter homes to multi-million
dollar mansions.
There are 3 big positives when it comes to investing in SFRs:
They’re cheap. As typically the smallest property type
available, the average investor can acquire a single family home
for less than any other type of real estate.
They’re numerous. There are more single family homes in
the US than any other type of property, which makes sense,
21
because they are the most popular type of real estate to own.
Consumers buy them. The retail market for SFRs is the
largest, because it’s not just limited to other investors and
businesses. Most individuals and families aspire to owning their
own home, meaning demand for single family properties is near
universal (especially important for Fix & Flips).
There are also problems with Single Family Residences when it comes
to real estate investing.
Of all property types, they are the most vulnerable and responsive to
macro-economic trends. This is largely due to their close relationship
with the lending industry & interest rates (since the majority of SFRs
are mortgaged), and leads to major economic events like the Savings
& Loan Crisis (80s – 90s) and Great Recession (2008).
As a result, in many high-demand markets (especially on the coasts),
single family homes have significantly more volatile price spikes than
other types of investment properties.
Finally, from an income vs. expense perspective, often SFRs can
return negative ROIs without the efficiencies brought by economies of
scale. Small portfolios of single family rental properties are
notoriously difficult to manage profitably without some special skills
(like self-managing or handyman / construction capabilities).
22
Img via: Mark Benson
Small Multi Family Properties (2 – 4
Units)
The category of small multi-family properties includes three “plexes:”
duplex, triplex, and quadplex (2 – 4 units).
What’s unique about this category, and keeps it divided from larger
(5+ unit) multi-family properties, is the way 2 – 4 unit properties are
treated by the US Federal Government (and therefore the traditional
banking industry). Specifically:
HUD & FHA generally categorize 2 – 4 unit properties the
same as SFRs.
HUD (the Federal Government’s Department of Housing & Urban
Development) and its subsidiary the FHA (Federal Housing
Administration) are in the business of insuring certain types of
mortgage loans offered by chartered banks.
23
In other words: there’s a whole family of loan products offered by
traditional banks & insured by the Federal Government that are
available for multi-family properties up to 4 units. This includes a
host of Owner Occupied programs in addition to more typical Non-
Owner Occupied real estate investment loans.
Ultimately, the pros and cons of 2 – 4 Unit investment properties fall
somewhere between SFRs and Apartment Buildings. You have more
rents per roof, foundation, frames, and walls, but can probably handle
every maintenance issue with the same skillset required for single
family homes. 2 – 4 unit properties don’t have quite the economies of
scale as larger apartment buildings, but they do have better cashflow
potential and less price volatility than single family homes.
Return to Navigation Menu…
24
Img via: AgnosticPreachersKid - CC-BY-SA-3.0
Apartment Buildings (5+ Units)
Apartment buildings & complexes are some of the most versatile
forms of real estate investment. Ranging from 5 and 6 unit
multiplexes to 500+ unit high rises.
Larger apartment buildings can provide investors greater economies
of scale. With 10+ units, there’s still only 1 roof, 1 foundation, and 4
walls. While certain maintenance requirements scale with the number
of units (kitchens, bathrooms, etc), apartment buildings can still
provide investors greater bargaining power buying in bulk.
The biggest challenges with apartment buildings are numerous, but
boil down to a few main factors:
25
1. Balancing Income & Expenses. Managing a portfolio of
more than a few units means running a real business, and
potentially a full-time job (if not for you, then someone you’ll
need to hire). You’ll need to focus on efficient marketing,
prudent management, tenant customer service, timely & cost-
effective repairs, consistent routine maintenance, and
reasonable cost of capital… to name a few.
2. Managing The Building(s). Just owning apartment
buildings can be a full-time job for a real estate investor, but
that’s not all you’ll need. Property management can itself also
require a significant investment of time & capital. That’s
because for every unit, you have another potential tenant, with
another potential set of problems, and another set of customer
service, maintenance, and collection requirements. One piece of
good news here: you can always just hire a property
management firm and merge this with Factor 1 above (taking
about 10% off the top to your property manager).
3. Timing The Market. This is practically impossible to do
perfectly, but worth putting significant effort into, especially if
you have a larger apartment building portfolio. Like all facets of
the economy, apartment building values rise and fall over the
years. While Net Operating Income (NOI) is your number one
priority, it can’t hurt to buy low & sell high. The same goes for
your financing: acquire properties & refinance during low
interest rate periods to weather interest rate hikes better than
competitors.
26
Ultimately, owning & managing apartment buildings is a major
undertaking, and requires significant determination, focus, and
expertise. You’ll need a mix of business, real estate investment, and
finance skills to succeed and thrive.
However, investing in apartment buildings is also one of the most
dependable strategies for well funded real estate investors, especially
institutional investors (REITs, hedge funds, private equity, etc).
Return to Navigation Menu…
27
Img via: Fletcher6 - CC-BY-SA-3.0
Commercial Real Estate
Commercial real estate encompasses a variety of different property
types, and is one of the largest investment asset classes on the planet.
Commercial properties can range from small shops to downtown
office buildings & skyscrapers.
The obvious factor that sets commercial real estate apart is that it is
owned for-profit by its investor(s). By this definition, many would
also categorize 5+ unit apartment buildings as commercial real estate
(and even technically 1 – 4 unit rental properties that are non-owner-
occupied).
However, since there are many specific factors unique to residential
properties not found in business-use commercial properties, for our
purposes commercial real estate can be defined as:
Non-residential, business-use real estate.
Specifically, that includes 3 main types of properties:
28
a. Office Space
Office space is the most common type of commercial real estate, from
small 3 – 4 office multi-plexes, to Class A downtown high rises. There
are a huge variety of potential issues when it comes to investing in
offices, enough so that many books have been written on the topic.
On the upside, they tend to have longer leases with more predictable
tenants, especially compared to residential properties. Plus,
commercial property leases in general can be more specific in terms
(various Net leases), giving both the landlord & tenant more flexibility
and options. In good economic times, or with good companies as
tenants, there is also the chance for continuously growing needs from
single clients.
On the downside, they require a special set of skills & expertise to
own, manage, and maintain profitably. The longer leases can leave
stepped-up or stepped-down rents lagging market rates. And of
course, location is crucial as office space will be significantly affected
by changing local economics & employment markets.
Ultimately if you are investing into Commercial Office Real Estate, it’s
important to understand it as a specialized asset class, not merely a
physical property. It has its pros and cons, but is definitely a
worthwhile component of a well diversified portfolio.
b. Retail
Retail properties share much in common with office space. Ranging
from small, outdated shops in suburban locations to downtown
(Central Business District or CBD) storefronts, malls, and major
shopping centers.
Similar to office space, retail properties are as secure an asset as the
companies that lease it. However, the requirements for a retail
property to be successful are not the same as an office, since it is
much more dependent on the local consumer market.
29
Retail properties need to be easily accessible by a high volume of its
target demographics. As such, it’s also important for retail tenants to
match the local consumer demand with their products & services
offered. It’s also important for Retail properties to be well located and
maintained to ensure consumers can access the stores & restaurants
conveniently without disruption.
Other than Retail’s focus on the Consumer market vs. Office
property’s focus on Businesses, the pros and cons of both types of
commercial real estate are very similar.
c. Industrial
Industrial real estate is one of the most specialized forms of
commercial real estate, because it is often literally built to suit one
very specific type of business tenant. From more general industrial
properties like warehouses & distribution centers, to highly
specialized properties like manufacturing or R&D facilities, Industrial
real estate encompasses a wide range of specific-use buildings.
Contrary to Retail and Office properties, Industrial real estate is often
not necessarily more valuable when located in downtown urban hubs.
Rather, Industrial properties are usually more focused on access to
logistics (major roadways, ports, train hubs, and airports). They’re
also heavily influenced by the type of companies which can lease
them.
One of Industrial real estate’s greatest positive attributes is the
potential for extremely long-term tenants, spanning decades when
circumstances are right. On the other hand, one of the biggest
challenges with Industrial properties is that they can be very difficult,
if not impossible, to re-tenant without making major changes that
require significant investments in construction & renovation.
Return to Navigation Menu…
30
Img via: Notorious4Life - CC-BY-SA-3.0
Raw Land
Raw Land is one of the simplest types of property to understand (no
buildings), but can be one of the more difficult to turn to a positive
ROI. The most common uses of Raw Land depend on its location, plot
size, utilities access, climate, vegetation, and grading. Some common
ways investors earn positive ROI from Raw Land include:
Residential development. Sub-dividing the plot to build
houses or multi-family apartments, then selling or leasing the
residences.
Commercial development. Building Offices, Retail, or
Industrial structures on the land, then selling or leasing them to
business tenants.
Agricultural development. Developing the land for farming
purposes, and either farming it directly or leasing it to farmers
to be cultivated.
31
Raw Land is really only suitable for experienced investors who
understand the nuances of building & development, since it will
require multiple steps from permitting, to architectural planning, to
materials sourcing, to actual construction. Each step in the process
requires special expertise and can rack up significant lost costs if not
carefully planned & managed.
Return to Navigation Menu…
32
“Should I Diversify By Working With
Different Property Types?”
One of the most common questions we get at Glassridge, from
beginning to experienced Investors alike, is whether one should
acquire, work with, and/or hold different property types in their real
estate investment portfolio.
Is it a good idea to invest in Single Family Residences, Apartment
Buildings, and Commercial Properties?
Or is it smarter to stick to one single property type, and only aim to
master the one?
This is ultimately a difficult decision that must be left up to each
individual real estate investor, however we do have several key
pointers I can recommend considering.
As a Lender on all types of property types in all types of local markets
around the USA, we have a unique perspective on what works & what
doesn’t. And ultimately, most successful investors share several traits
in common when it comes to diversification.
1. Investment Strategy. The first step in identifying the right
type of property for your real estate investing is your broader
investment strategy. If you’re looking for Fix & Flips, chances
are SFRs will take up a majority of your transactions. If
you’re more focused on Buy & Hold, your options vary, so
you’ll need to consider other factors carefully.
2. Existing Expertise. If you already own a construction
company, it makes a lot of sense to focus on Raw Land,
development, and Fix & Flip projects. If you’re an
experienced Commercial Real Estate Agent, it might make
more sense to focus on Buy & Hold strategies on apartment
buildings and commercial properties. Stick to what you know
when possible, and leverage your existing resources &
expertise for a competitive advantage in whatever property
33
types you choose to invest.
3. Portfolio Size. Unless you have a multi-million dollar
portfolio to manage, you can probably get away with only
one property type. As your portfolio grows, you’ll need to
more carefully assess your risk exposure to various micro-
and macro-economic scenarios to help guide your
diversification plans. Even multi-billion dollar REITs and
portfolios have been built on a single property type.
4. Location. If you are most familiar with a local
neighborhood or urban center, then it makes a lot of sense to
focus your investing nearby. Pick what type(s) of real estate
make the most sense in that area, and begin there.
5. Access to Capital. One of the most crucial factors to
success in real estate investing is financing. You might find it
much easier to finance single family fix & flips than
commercial real estate acquisitions. It makes sense to go
where you can get the money.
6. Management Burdens. As your portfolio grows, you’ll
need to handle day-to-day operations, maintenance,
marketing, and customer service for your tenants. You’ll
either need to factor in the cost of outsourcing this to local
service providers, or to carefully consider what type of tenant
you find most desirable (single families, corporate firms,
retail stores, manufacturers & distributors), to guide you to
the right type of properties.
There is no easy answer as to what type(s) of real estate investment
properties to buy. If you consider the above 6 factors, chances are
good you can come up with a few top choices, and if you still have
questions, we’re always happy to help if you contact us directly.
Return to Navigation Menu…
34
Img via: Tracy Olson – CC-BY-2.0
CASH PURCHASE vs. REAL
ESTATE LOANS
Pros and Cons of an All-Cash Real Estate
Purchase
It almost goes without saying, but obviously not everyone can pull
together the cash to make all-cash real estate purchases in the first
place, especially if we’re talking values in the multi-millions. Even
$100,000 properties are expensive to purchase in all cash for 90% of
the population.
Of course: there is the option of an equity partnership with someone
who does have the liquid cash to do your real estate deals, but first
let’s assume the cash is yours.
35
All-Cash Purchase: PROS
There are very clear pros to an all-cash purchase, if you can afford it.
You’ll be happy to have no need for 3rd party financiers (no
banks, hard money lenders, or boards who can veto your choice). This
means you can close fast in a way that is ideal to sellers, giving your
offer extra weight even potentially compared to higher offers that
aren’t backed by cash on the spot. You have the final say, you decide
what it’s worth, and you can either close the deal or walk away.
Without taking on 3rd party financiers or investors, you’ll also save
money & boost your ROI. Financing isn’t free, and in some types
of especially short-term transactions, can represent one of the single
highest costs. By going for an all-cash purchase, you cover all the
costs, and you reap all the rewards. When things go well, this is the
ultimate outcome for the 100% equity all-cash owner.
I could go on & on about the benefits of an All-Cash Purchase. There
are a lot.
All-Cash Purchase: CONS
Far too many real estate investors idealize all-cash purchases, and
forget the many significant downsides of tying up so much of your
own money in directly owning property.
The biggest negative of an all-cash purchase is Opportunity
Cost. By employing zero leverage in your real estate investing
strategy, you’re growing slower, doing fewer deals, and possibly
getting a worse return on your money to boot. Ignoring this time-
tested, proven use of long-term financing is wasteful.
Only real estate, as an asset class, can employ the type of leverage
offered by traditional & specialized mortgages.
Here’s a fun little thought experiment to illustrate:
36
Imagine going to your investment banker to purchase 1000 Amazon
(AMZN) shares…
… then telling them you’ll only be making a 20% down-payment while
they finance the rest over the next 30 years at a fixed interest rate for
the first 10.
It’ll never happen.
And while that might never happen buying stocks or bonds, that’s a
normal, even easy type of financing to get for a real estate purchase.
Chances are you can find real estate lenders who’ll let you put down
as little as 10% or even only 5% (covering the rest with a loan). The
real estate industry is built on financing, and an All-Cash Purchase
misses out on this huge opportunity. Using zero leverage leaves your
money tied up in fewer deals, limiting your investment
growth.
Lastly, that still neglects the Opportunity Cost generated by the
spread between your cost of financing & what you could’ve earned
with the same funds invested elsewhere (like a diversified stock
portfolio). This is especially true on longer term Buy & Hold
strategies, for example: if you could have borrowed at 9%, and put
your cash into a mutual fund earning 14%, you’re basically wasting
5% annually by not using the loan.
These are still over-simplifications, but it’s clear the opportunity cost
of ignoring real estate financing neglects one of the biggest unique
value propositions of investing in real estate in the first place!
(Of course, we’re a little biased as lenders ourselves.)
Pros and Cons of Real Estate Loans
Real estate financing is one of the largest segments of the banking
industry, and plays a key role in most real estate ownership globally.
Real estate loans are also one of the highest volume financial
instruments in the world.
37
Even a simple mortgage between a banker & homeowner is not so
simple these days. With all types of real estate loans frequently being
securitized, chopped up in tranches, and re-bundled for maximum
diversification, real estate loans influence all corners of the financial
sector from bank balance sheets to retirement accounts to sovereign
wealth funds. The sweeping, global economic effects of the Great
Recession, triggered by US-based residential mortgage backed
securities, are a testament to the long reach of real estate financing.
Love them or hate them, real estate loans are here to stay. Here are
some of their Pros and Cons to consider as an investor.
Real Estate Loans: PROS
The biggest pro of real estate loans is obvious: they make it possible
to purchase properties you otherwise couldn’t afford! Plus,
compared to almost all other types of financing, real estate loans tend
to have quite reasonable rates & terms, especially on long-term
traditional & private mortgages.
Real estate financing is also valuable for its synonymous term:
leverage. By selectively & carefully using financing in your real estate
investing, you can gain greater leverage to buy more properties,
build a bigger portfolio, do larger deals, and otherwise attain greater
assets & cashflow than you could have with less leverage.
Another important pro of real estate financing is the time span.
Whether you need a 12 month loan term for a quick Fix & Flip, or a
30 year loan for a long-term Buy & Hold, real estate financing will
make it possible to pay in all cash today, but space out the
actual expense over the term of the loan. Plus, with the option to
refinance or sell a property before a loan term ends, it’s possible to
see great cash-on-cash returns if the property value appreciates while
you own it under a mortgage.
Real Estate Loans: CONS
The biggest downside of real estate financing is risk.
38
Taking out a loan means you’ll need to pay it back, in full, regardless
of whether or not your real estate investment is profitable. You’ll still
need to pay back the lender, even if it means taking a negative ROI,
otherwise you risk foreclosure or worse.
The risk of real estate financing is real and ever-present. That’s why
taking out loans for investing in real estate is not for everyone, and
needs to be carefully considered & understood. Most lenders dislike
repossessing assets almost as much as the Borrowers dislike having it
done, so every stakeholder in a real estate investment loan wants to
see the real estate investor succeed.
The second biggest negative of real estate financing is cost.
No matter how you slice it, the cost of a real estate loan, whether
short- or long-term, is going to be one of the largest expenses on most
of your real estate investments.
Short-term loans tend to come with higher rates, to the point that you
might be paying as much as 15% - 20% on a deal for a loan term of
just 12 months.
On the other hand, long-term 30 year loans, even at rates as low as
4% - 6% will add as much as 75% - 100% to your total cost of
ownership over the course of the loan. In other words, while $100k @
4% for 30 years might be less than $500 per month, but it will add an
extra ~$75k (about 75%) to your total acquisition cost! That’s before
factoring in additional expenses like insurance and maintenance.
Last Word: Cash or Financing?
Ultimately the choice between buying 100% equity in all cash vs.
using real estate financing will come down to necessity. Unless you
are an extremely well capitalized institutional investor, chances are
you will reach a crossroads early in your real estate investing where
borrowing to acquire property will open doors to greater income &
portfolio growth. All-cash investors can almost always be making
more by leveraging up at least a bit.
39
The bigger question, then, is how much real estate financing
makes sense?
This is a question of numbers, and will come down to accurately
calculating a swath of figures as accurately as possible. Look at the
total cost of the loan, not just fees, points, and annual interest. Look
at holding costs, buying & closing costs, and selling costs. Look at
potential rents & expenses.
And then put up an amount of cash that makes the most sense, and
borrowing an amount that will earn you the best ROI & present the
best opportunities to grow your real estate assets. Sometimes a lower
LTV will be much more profitable, while at others it makes sense to
leverage as high as possible, even borrowing +90% of your total cost.
Return to Navigation Menu…
40
Img via: Tresdetres
Real Estate Financing: Simplified In general, when the words “Simplified” and “Financing” are too close
together, I’d recommend being wary. Financing is complicated, and
simplifying will naturally leave out a lot.
Whenever making major finance-related decisions, I highly
recommend you consult with local, trusted specialists
(attorneys, accountants, brokers & agents, etc).
In this chapter, we’ll provide enough info to give you an excellent
foundation in the important basics of real estate finance. After
reading, you’ll be able to easily navigate all types of real estate loans &
41
financing concepts. Plus, you’ll know the jargon so you can more
fluently converse with finance industry professionals.
FOUR TYPES OF REAL
ESTATE FINANCING The following list of four real estate financing “types” is by no means
comprehensive. There are certainly more nuanced & niche real estate
financing options which are not discussed here. However, if you
understand the 4 “types,” you’ll be able to easily grasp pretty much
any real estate finance concept as it would relate to any combination
of these.
1. Equity Investors
Using Equity Investors to capitalize a real estate project would
technically mean you are in some form of partnership or joint
venture. Generally this is most easily accomplished by forming an
LLC or other entity as co-owners with your equity investor(s).
They provide the capital, you do the deals, or something similar.
Technically this isn’t really “financing” since you are joint equity
owners. That also means you’ll be splitting your potential gains
(and losses) based on your outcome. This might be a positive
for you in the short-term if the project loses money and your
investor(s) cover the losses.
However, working with equity investors tends to be the most
expensive form of capital if you are successful, since they are typically
going to be taking a percentage of the total profits (usually 50% or
more).
Taking on equity investors is also quite strictly regulated, so:
IMPORTANT: Before you take on or even solicit any equity
investors, make sure to consult with a qualified legal
42
professional! Certain approaches are illegal without
licenses.
One option for more experienced investors is selling shares in a
private real estate investment fund to accredited investors, where you
might be able to pay your investors a fixed return as opposed to a
percentage of profits.
2. Bank Loans
A bank loan or bank mortgage is the most common type of real estate
financing, and also one of the largest single financial products by
volume on the planet.
They are a very affordable option when you can get them, and should
always be considered a top priority.
However, bank mortgage loans have a lot of restrictions due to the
way the Federal Government insures certain types of loans through
FHA.
Typically, nearly all bank mortgages in the USA are for Owner-
Occupied properties. FHA-insured loans are only available on “single
families” which by their standards means 1 – 4 unit buildings.
It can be very difficult (if not impossible) to secure a bank mortgage
to purchase an under-valued property for Fix & Flips. Anything but
the most straightforward market-rate Buy & Hold residential rental
acquisition can be tricky too.
There is a limit to the total number of FHA secured bank mortgages a
single individual can attain (including loans to companies in which
you’re a majority owner).
In spite of their many restrictions, the unbeatable rates & stability of a
30 year bank mortgage make them desirable. It is highly
recommended you take advantage of this type of real estate financing
in all situations where it makes sense.
3. Owner Financing
43
Owner financing is where the seller lets you pay a portion of the
purchase price over a period of time. Sometimes, this will be simply
factored into the purchase price, without any type of separately
calculated interest rate (effectively providing you a fixed interest rate
calculation if you know how much more you’re paying to finance vs.
closing in all-cash at closing).
Since it’s simply a private agreement between you (the Buyer) of a
property, and its Seller, Owner financing can literally encompass
anything (legal).
A retiring landlord might be willing to finance your purchase of his
property for an ongoing share in the profits for a fixed period of time.
Some sellers need a certain amount of cash now, but are willing to
negotiate on terms to pay back the rest.
Ultimately, your Owner financing arrangements are only limited by
your imagination & negotiation abilities. Frequently, so long as the
terms are clear, you can also combine Owner financing with other
forms of financing like Bank Loans & Private / Hard Money Loans.
4. Private Hard Money Loans
Private Hard Money Loans are real estate loans issued by non-bank
lenders, usually for the purpose of real estate investment.
The most popular, common, and well known type of Hard Money
Loan (HML) would be for Single Family Fix & Flips, where an
investor is buying a house to quickly add value via renovations &
improvements, then sell or refinance. Typically this type of Fix & Flip
HML will be short-term (around 12 months), and high cost.
At the end of the day: any loan issued by a non-bank lender for
the purpose of real estate investment could be considered a
Private Hard Money Loan.
That means whether you borrow a portion of a property’s purchase &
rehab cost from one of the 3 F’s (Family, Friends, and Fools), or you
take a loan from an experienced, professional Hard Money Lender,
44
you could technically call that a “Hard Money Loan” due to the broad
definition thereof.
The most important factor to consider when it comes to HMLs is:
There is a Hard Money Loan option for practically every imaginable
real estate investment scenario.
From the short-term Fix & Flip HML described above, to longer term
Single Family Residence Rental Property Loans (including up to 30+
years like a traditional bank mortgage), to Construction Financing, to
various Commercial Real Estate loans, and even Agricultural Land
Financing.
The possibilities for using HML financing to build your real estate
investment business & portfolio are practically endless, and limited
only by your ability to find the right Lender to close on your deal.
Return to Navigation Menu…
45
Img via: Guy Kilroy – CC-BY-2.0
PROFITING FROM REAL
ESTATE LOANS Regardless of the type of real estate financing you’re considering, the
ultimate goal is most likely to make a positive Return On Investment,
to make a profit.
Unless you’re borrowing to purchase your primary residence or
vacation home, the entire purpose of taking out a real estate loan is to
help achieve your investment goals. Whether that means short-term
rapid gains, or long-term cashflow & stability, there is almost
definitely a real estate financing option available to help you get
there.
The key is to understand how & why you’re borrowing a real estate
loan in the first place, then make sure the loan you’re considering
matches your goals.
It’s a numbers game, so you can start from the math and work
backwards.
46
Calculating Rough ROI: The Basics
Your total Gross Profit is equal to:
Gross Profit = Total Income – Total Expenses
Or, as an ROI percentage:
ROI = Gross Profit ÷ Total Out-of-Pocket Cost
Let’s illustrate with a couple of extremely simplified examples.
Note: These calculations are substantially over-simplified for real-
world application, and neglect several important factors like closing
costs, insurance, escrow, inspections, appraisals, property holding
costs, selling costs, and taxes.
Please keep in mind they are strictly for illustrative purposes, and not
to be used as an instructional guide to actually calculate your real
estate investment ROI.
ALL-CASH FIX & FLIP
I am buying a Fix & Flip, all in cash (no financing), for $100,000. I’m
also planning to put in $50,000 for renovations & repairs. Then, I’ll
sell the property for $200,000.
Gross Profit = $200,000 – ($100,000 + $50,000) = $50,000
As a percentage:
$50,000 ÷ $150,000 = 33%
In other words, assuming this Fix & Flip took exactly 1 year to
complete, my annual ROI would sit at 33% ($50k income from $150k
out-of-pocket costs).
FINANCED FIX & FLIP
Now, to illustrate how real estate financing can significantly help
boost cash-on-cash ROI when used correctly, let’s look at the same
Fix & Flip example from above, but this time assume we are
47
borrowing at a 75% LTV (Loan To Value ratio) of the as-is price +
rehab costs.
In other words, for the $100,000 purchase price + the $50,000
renovation cost, we’ll borrow 75% (and pay cash for the remaining
25%). This will make for a loan of $112,500, and an out-of-pocket
hard cost of $37,500.
Let’s also assume that the loan is a one year (12 month) Hard Money
Loan, with an origination fee of 4 points (4% of $112,500 = $4,500),
and an annual interest rate of 12% (12% interest on a 12 months loan
= about $13,500). Let’s plug that in to our ROI calculation from
above, to see what we discover:
Gross Profit = $200,000 – ($20,000 + $112,500 + $37,500) =
$30,000
We’re actually earning a smaller gross profit than if we did the deal in
all-cash by $20,000, or 40%.
However, we also only had to put up $37,500 of our own money (vs.
$150,000), so let’s check out our cash-on-cash ROI as a percentage:
ROI = $30,000 ÷ $37,500 = 80%
So, while the Hard Money Loan reduced our total Gross Profit on the
same Fix & Flip deal by $20,000, we increased our cash-on-cash
returns by 37%!
That’s because we only had to risk $37,500 of our own funds to do the
deal, vs. investing the entire purchase & rehab cost of $150,000.
While this example is horribly over-simplified, it helps to put some
numerical perspective on how & why you might drastically improve
your real estate investment ROI by leveraging up even with a
relatively high cost real estate loan.
The Lender’s Job Is To Loan You
Money!
48
Now that you can see that sometimes you’ll earn much better returns
by employing real estate financing to do your deals, it’s important to
see the deal from the other side of the table: your Lender’s.
To repeat that simply:
The Lender’s job is to loan you money!
As a Lender, we don’t get paid unless you secure financing, close on
the deal, and ultimately produce enough of a positive ROI that you
can afford to pay back the loan.
That means your lender wants to see you succeed almost as much as
you do.
Sometimes your real estate loan provider will be your biggest
advocate for getting deals. Indeed, if you are a successful repeat deal
maker & borrower, you will be any Lender’s ideal client, meaning a
good Lender will work hard on your behalf to get the financing you
need and help close the deal.
Any real estate investment loan provider is always looking for
qualified deal makers, and have several tell-tale signs for which we’re
always on the lookout.
What Your Lender Wants To See
When you keep in mind that your Lender’s job is to loan you money,
you can start to deduce what your Lender wants to see.
To put it simply: Lenders are looking to fund hot deals!
Your lender wants to see a “sure thing” to be sure that you’ll be able to
pay back the loan and leave enough profit margin to not cause worry
or concern. There are a variety of factors that your real estate Private
Hard Money Lender will need to understand before being able to fund
your loan.
Here are several of the most common things your Lender wants to
see:
49
1. The deal itself.
Is it a good deal? Are your valuation estimates accurate? If
you’re going for a Fix & Flip, are you leaving enough profit
between your ARV and Purchase Price + Rehab Cost? If it’s a
Buy & Hold, what are the rents and expenses? Occupancy rate?
Are you in a Buyers’ or Sellers’ market? What prices are
comparable properties selling for?
All the factors you’re evaluating on the deal will also be
important to your Lender, because they get paid when you get
paid.
Your Lender is (probably) not going to be as much an expert at
your local real estate investing markets as you, the Real Estate
Investor. However, Hard Money Lenders are numbers experts,
and they will be doing due diligence on the deal itself, first and
foremost.
2. Your qualifications.
This will include everything from your deal history (last 12
months, and historical), real estate experience, FICO score,
credit reports, and tax returns.
Especially if it’s your first time borrowing from a specific
Lender, the only way they’ll be able to evaluate your credit-
worthiness is via checking your background & qualifications.
This will play a crucial role in deals that are weaker on the other
factors like the deal itself and your collateral.
3. Your collateral.
If the deal is hot, and you’re buying it at a price that is
significantly below its current resale value, then the deal itself
50
should provide enough collateral for most types of Hard Money
Loans.
However, if your purchase price is closer to retail market rates,
or your project will require a significant investment for rehab &
renovations (rivaling or surpassing the purchase price), or if
your qualifications, background, and track record are somewhat
lacking… Your available collateral will be the key to getting the
deal closed.
There are 3 primary types of collateral your Lender wants to
see, any one of which can be enough to ensure success in getting
financing:
Liquid assets (cash on hand).
This is strictly the liquid cash you have available in your
bank accounts.
Depending on the other qualifying factors, some Lenders
might require “seasoning” of these funds, meaning they
will need to have been in your bank account for a set
amount of time before you can use them to help secure a
loan (usually 3 – 6 months).
Current monthly income.
Your monthly income is crucial on any type of loan that
will be requiring monthly payments (which includes 80 –
90% of HMLs).
Your lender wants to see that, even in the event of
potential pitfalls or unexpected problems related to the
underlying deal itself, you will still be capable of paying
the monthly loan note.
51
Sufficient income alone is often enough to close on a loan,
in spite of weaker qualifying factors otherwise.
Other real estate owned.
Sometimes, the only way to get a deal closed will be cross-
collateralization. In other words, to borrow against your
purchase and/or rehab of Property A (the deal itself),
you’ll need to collateralize with a 1st or 2nd lien against
Property B (another property you already own).
This usually only occurs when most if not all other
qualifying factors are weak.
For example, a Foreign National, with only ok credit, and
minimal liquid assets & income, who wants to Buy & Hold
a rental property that is already near market rates, might
be in a situation to require cross-collateralizing with other
owned properties to ensure their deal will close.
Ultimately, one of the greatest advantages of borrowing from a
Private Hard Money Lender is the added flexibility.
Your Hard Money Lender wants to see you succeed on your deal, pay
back the loan, continue to grow, and come back for more & more real
estate financing for decades to come. That’s why a good Private Hard
Money Lender will work with you to help gather your proofs for all
the above qualifying criteria.
We want you to qualify on loans that will help you succeed, because
we only are successful when you are. However, it’s important to be
realistic about your own qualifications as a potential borrower before
seeking financing. This will give you the best possible opportunity to
close faster on loans with better rates.
52
Img via: Eflon – CC-BY-2.0
BANK LOANS vs.
ALTERNATIVE
FINANCING There are many obvious (and not-so-obvious) similarities &
differences between Bank Loans and alternative financing like Private
Hard Money Loans. Depending on your situation, one or the other
might be an obvious choice. In other cases, it might be a toss-up,
where choosing a Bank Loan or a Hard Money Loan is practically
equal.
The following chart will examine several aspects of each type of loan
to help give you some at-a-glance perspective on both options. Note
that the “Bank Loans” column refers to all types of bank financing,
not strictly FHA insured mortgages (unless otherwise specified).
53
Features & Benefits Bank
Loans
Hard
Money
Available for long-term Buy & Hold
investments on 1 – 4 unit properties? Yes. Yes.
Available for short-term Fix & Flip
investments on 1 – 4 unit properties? Usually No. Yes.
Provide the lowest interest rates, near
the Fed. Win. Lose.
Available in flexible durations, from
short-term (12 – 24 months) to long-
term (5 – 30+ years).
Lose. Win.
Maximum of 10 FHA insured
mortgages. Yes. No max.
Flexibility to borrow on all property
types (from SFRs, 2 – 4 unit, 5+ unit
apartment buildings, commercial, and
more).
Lose. Win.
Easy to close fast, even in low doc & no
doc scenarios. Lose. Win.
Ultimately, both Bank Loans and Private Hard Money Loans have a
place in your real estate investment strategies.
The key is to understand the strengths & weaknesses of both, and
utilize them accordingly.
Hard Money Loans tend to be more expensive, but also much more
flexible.
Bank Loans offer more consumer protections and cheaper rates, but
lack flexibility and are very strict as to what they can (and cannot) be
used to accomplish.
54
Are Private Hard Money Lenders Worth
It?
Obviously, our answer is of course YES!
There are plenty of real estate investment deals for which bank
financing will be difficult (or impossible) to secure, that literally can
only be funded by Hard Money.
Indeed, even simple Single Family Fix & Flips are exceedingly
difficult (if not impossible) to get funded by a traditional Bank Loan.
Plus, a practically infinite variety of other more niche investing
strategies & deal types can only be financed by Hard Money Loans –
from unique construction projects, to renovation, rehab, and value-
add plays, to multi-property portfolio loans & refis.
The most important factors to keep in mind when deciding if a Hard
Money Loan is worth it for your specific deal are the numbers.
Does the deal make sense when factoring in the cost of financing?
Is it leaving you a healthy profit, helping you do more deals, growing
your portfolio faster, increasing your positive cashflow, and/or
putting more money in your pocket?
If you carefully and truthfully run the numbers, and the Hard Money
Loan looks feasible & profitable, then it’s a no-brainer.
On the other hand, if you’re looking at a deal with slim margins, or a
deal that could be easily funded by a traditional (and likely cheaper)
Bank Loan… then a Hard Money Loan might not be the best choice.
The keys to succeeding with Hard Money Loans are: running the
numbers, analyzing the scenario, and making sure the deal is
going to generate a positive ROI.
If so, it’s definitely worth it!
Return to Navigation Menu…
55
Img via: StockSnap
Mastering Hard Money Loans The path to mastery is long & fraught with risks, challenges, victories,
and defeats along the way. Mastering Hard Money Loans are no
different.
Indeed, mastering real estate financing more generally is one of the
most valuable skills to study. Real estate is a crucial asset class, and
leverage is power when used correctly. As someone who’s sat on both
sides of the table, as both Lender & Borrower, the skills I’ve acquired
and lessons learned have made me hundreds of thousands of dollars
in the process.
56
And I am far from mastery when it comes to real estate financing &
investing!
True masters of this field are the billionaire moguls and deal makers
who have streets, buildings, museums, and development projects
named after them. The world of Private Real Estate Financing ranges
from simple $100k Fix & Flips to $100m+ portfolio acquisitions.
While nothing but decades of experience can make you a
master of Hard Money Loans, in this section, we’ll be laying the
foundation for newcomers, plus sharing insider’s tips & tricks to
immediately improve your Hard Money ROI.
WHAT ARE HARD MONEY
LOANS? Hard Money Loans are real estate investment loans. They’re issued by
Private Lenders (as opposed to Banks). Usually, they are only
available for Non-Owner-Occupied properties, preferably owned by a
business entity.
Hard Money Loans are regulated on a state-by-state basis, and thus
have a very confusing & chaotic marketplace. There are nationwide
Hard Money Lenders, local Hard Money Lenders, and everything in
between.
Glassridge is a Nationwide Private Hard Money Lender.
We can help you get real estate financing for almost any real estate
investment, on any property type, in almost any location in the USA.
Hard Money Loans come in short-term and long-term varieties, from
12 – 24 month Fix & Flip or Bridge Loan programs, to 10, 15, and
even 30+ year Buy & Hold loans similar to bank financing.
57
Hard Money Lenders will provide financing on all types of investment
properties, from SFR rental properties or Fix & Flips, to multi-family
(up to 500+ unit apartment complexes), to portfolio loans &
refinancing, to commercial real estate, to construction projects & land
acquisitions.
Any financing granted for the purpose of real estate investing, secured
by real estate, and issued by a private, non-bank lender, is a Hard
Money Loan.
Private Lenders vs. Hard Money Lenders
While there has been ongoing debate as to exactly what factors differ
between “Private” Lenders and “Hard Money” Lenders, there is no
factually defined difference between the two.
Typically, when people make a distinction between Private Lenders
and Hard Money Lenders, there are a few things they might mean:
1. Friends, Family, and Fools. One type of “Private” lender
that some identify as distinct from “Hard Money” lenders would
be the typical 3 F’s. In this sense, one could say they are
technically issuing a “hard money” loan since they are not a
bank, and therefore not able to loan on fractional reserve
(meaning they had to have the liquid cash to loan in the first
place). From this perspective, when imagining the 3 F’s are
“Private” lenders, ultimately what we’re imagining are non-
professional (amateur / part-time) lenders.
2. High Net Worth Individuals. The other type of “Private”
lender that some differentiate from a “Hard Money” lender
would be a High Net Worth Individual who doesn’t advertise
themselves or their services as a lender. Once they do advertise
themselves as a lender, by definition, they become a traditional,
standard Hard Money Lender.
Ultimately, it is our opinion that there is no clear, defined
difference between a “Private” lender vs. a “Hard Money”
58
lender, and as such we treat both the same in all our
communications.
To keep things simpler still, we frequently refer to ourselves as
Private Hard Money Lenders, demonstrating the potential blur
between both “categories.”
What matters most in private, non-bank lending are 3 simple factors:
Rates
Terms
Trust
If your Private / Hard Money Lender can help you close deals at
reasonable rates, with fair terms, and both parties stick to their word,
repaying the loan according to the agreement, it doesn’t really matter
whether you call them a “Private” Lender, a “Hard Money” Lender, or
a “Private Hard Money” Lender.
It all comes down to trust & capital. The rest is up to you to get deals
done.
Return to Navigation Menu…
59
Img via: Cerce Denyer
The 3 Hard Money LTVs
In real estate financing, the LTV is the Loan To Value ratio. That
is, the percentage of the property Value that is financed by the
Loan. In other words, if you buy a $100,000 property, and put 25%
down ($25,000), then borrow the rest ($75,000), your LTV would be
75%.
Another way to think of it is as your skin in the game… except the
actual ratio % is referring to the Lender’s skin in the game. Subtract
from 100% and you’d get your own cash investment as a percentage
of the total property Value.
When it comes to traditional bank financing, there’s really only one
LTV: the Loan to Appraised Value (As-Is). With Private Hard Money
Loans, there are actually 3 distinct and important LTVs which can all
either help or hurt your chances at closing fast at the best rates.
Return to Navigation Menu…
60
LTV 1. As-Is LTV
The easiest to understand LTV, which is practically identical with
both bank mortgages and private loans: As-Is LTV. This is the Loan
To Value ratio based on the property’s current, fair market value, in
as-is condition without any repairs or improvements.
Regardless of whether the property is in tip-top upgraded condition
or it requires major renovations, a value can be determined for what
it’s worth right now, as-is. Usually this is determined via Appraisal or
Broker Price Opinion, and works about the same for a bank or a
private lender.
The important thing to remember about As-Is LTV is:
The current As-Is Value will be the total collateral in the
property at time of purchase.
Borrowing more than the property’s As-Is Value will generally
require a special type of financing that not all lenders offer, and will
almost only be found through private hard money.
LTV 2. Purchase Price LTV
The Purchase Price LTV is the first specialized Loan To Value ratio
where hard money starts to excel & show its flexibility. When you’re
buying property as an investment, a common & obvious strategy is to
buy low and sell high.
As such, your Purchase Price will frequently be lower than
the property’s As-Is Value. We’ve seen investors acquire
properties at a Purchase Price as much as 90% off the actual current
fair market As-Is Value, thanks to bulk purchases & motivated sellers.
You might have a hard time finding a traditional bank loan that will
loan against a property’s As-Is Value when you’re buying at a
discounted Purchase Price. However, this trick to help you get
significant instant equity is common among hard money lenders.
61
More flexible loan programs might even grant you a discount on the
loan rates by basing Rates & Fees off the Purchase Price LTV (lower
amount), while still allowing a maximum loan amount based on the
As-Is LTV (higher amount).
LTV 3. ARV LTV
The ARV (After Repair Value) LTV is unique to specialized Hard
Money Loan products, and is one of the most useful financing tools
for Fix & Flip investors. Simply put:
ARV LTV Loans will let you borrow against a property’s After
Repair Value, even if that amount is significantly greater than the
property’s current As-Is Value and your Purchase Price.
To illustrate, let’s take an example of a hypothetical Fix & Flip. Let’s
say we buy a property for $100,000, that has an As-Is Value of
$120,000 ($20k discount Purchase Price). We also know we’re going
to need $20,000 for rehab & renovations. That means in total we’re
going to need $120,000 to do the deal ($100k Purchase Price + $20k
Renovations).
That’s ok, because we’ve calculated an After Repair Value (ARV) of
$180,000, so we know there’s a good opportunity.
Now, depending on priorities, we might be looking to put as little of
our own money in as possible. In which case, we’ll be looking for a Fix
& Flip loan that is calculated at an ARV LTV. Even a 75% LTV on the
$180,000 ARV would be $135,000, more than the total cost to do the
deal!
Generally, Lenders do require the Borrower to at least have some skin
in the game, but thanks to the unique opportunity of Hard Money
ARV LTV loans, extremely qualified Borrowers can max at out around
90% Purchase Price & 100% of Rehab Costs if the ARV is high
enough!
Return to Navigation Menu…
62
Image via: endlesswatts
WHEN TO USE HARD
MONEY LOANS
By now, you’ve probably recognized that Hard Money Loans are not a
fit for all scenarios. Sometimes a deal will only make sense if you can
pay cash (out of pocket, or via equity partners). For plenty of other
deals, you’d be much better off seeking bank financing to save on
rates & fees compared to private hard money.
However, there are a variety of real estate deals, transaction types,
investment strategies, and loan scenarios that will almost always only
be fundable by a Private Hard Money Lender.
Here are some of the most common scenarios in which we’d
recommend using a Hard Money Loan.
Fix & Flip Financing
When it comes to Fix & Flip Loans, on everything from simple single
family renovations to complex apartment building & commercial
property rehabs, bank lenders tend to steer clear.
63
Bankers generally prefer to fund up-to-date, cashflow positive, non-
speculative real estate investments. These deals are less risky, with
fewer variables, and are more within the restrictive, highly regulated
bank mortgage’s territory. Indeed, FHA insured loans are only
available on 1 – 4 unit properties, and are very difficult (if not
impossible) to get on a property that needs major renovations or
improvements.
Despite (or perhaps thanks to?) this major short-coming in today’s
bank mortgages, Fix & Flips are the most popular type of Hard
Money Loan scenario. That’s because, while risky & speculative, a Fix
& Flip is also one of the most profitable real estate investment
strategies for the right real estate investor.
Hard money is hands down the best (and usually the only) choice for
your Fix & Flip Loan needs.
(Certain) Rental Property Purchases
It’s possible to get bank financing on a variety of rental property
types, from SFRs and 2 – 4 units (on which mortgages can even be
FHA insured), to 5+ unit apartment buildings, and even commercial
real estate (which is largely funded by banks).
However, there are a huge variety of rental property purchase
scenarios that will be practically unfundable through traditional bank
lenders. For example:
Rental properties that need major repairs or
renovations. If your property is currently well under market
value due to damage or neglect, good luck finding a bank loan
that will fund your acquisition or rehab costs on the “as is”
property.
Similar to Fix & Flip financing, Hard Money Loans are ideal for
funding the acquisition & renovation of under-valued rental
assets in “as is” condition.
64
Multi-unit rental properties suffering from major
mismanagement. Whether you’re looking at significantly
under-market rents, bad tenants, high vacancies, neglected
routine maintenance, or all of the above, multi-unit rental
properties that are under-valued due to mismanagement will be
difficult to fund through the bank.
In common with rental properties that need repair &
renovation, Hard Money Loans are perfect for the savvy
investor who is looking to add value and gain near-instant
equity by purchasing then improving under-valued rental
assets.
Deals That Need To Close Fast
The ability to close fast is perhaps the most well-known quality of
Hard Money Loans.
A Private Hard Money Lender doesn’t care about the same level of
documentation & red tape that significantly restrict traditional bank
financing. Indeed, there are certain specialized “Low Doc / No Doc”
Hard Money Loan options that require as little as a bank statement &
property address to secure funding.
If you’re working on deals that absolutely must close fast, then 9
times out of 10 a Hard Money Lender is going to beat out any bank
(especially on nationwide bank lenders, because they will almost
definitely need to send out for approval from a central branch office
before closing)!
Cash Out Refinancing
A Cash Out Refinance is a type of real estate loan where a property
owner borrows against current equity to pull out cash. Similar to a
reverse mortgage or Home Equity Line Of Credit (HELOC), it is
typically used by property owners who wish to liquidate some existing
equity they have built and/or improve their loan rates & terms.
65
Hard Money Loans for cash out or rate/term refinancing are going to
be significantly more flexible than anything offered by your
bank.
In some cases, especially on properties or portfolios that require
upgrades & renovations, you might not even be able to get a reverse
mortgage or HELOC from the bank. Similarly, if your credit score is
low, or you have unstable income, or if you want to consolidate
multiple properties into a single Blanket Portfolio Loan, a Hard
Money Lender is going to be your best (and perhaps only) option.
Cash Out Refinancing with a Hard Money Loan is useful especially for
Borrowers who plan to keep high equity (low LTV), and is particularly
advantageous for refinancing multiple loans on multiple properties
into a single Blanket Portfolio Loan (which can be difficult if not
impossible to get through traditional bank financing options).
These are a great way for real estate investors to access more capital
for acquiring new properties, growing your investment business, and
upgrading existing properties without putting up much (if any) of
your own cash.
Bridge Loans / Provisional Financing
Sometimes also referred to as a swing loan, gap financing, or interim
financing, a Hard Money Bridge Loan / Provisional Financing is
basically a very short-term real estate loan designed to help “bridge” a
funding “gap” for whatever reason.
From quick acquisitions on wholesale transactions, to very simple
renovations on Fix & Flips, to bridging a gap between now & when
more permanent financing is secured, a Bridge Loan or Gap Funding
requires quick closing and flexible terms.
In that sense, these types of short-term financing options for creative
real estate investment strategies are pretty much only attainable from
a Private Hard Money Lender. There’s pretty much no equivalent
offered by the bank other than the very difficult to attain, and
generally low-balance types of personal & business lines of credit.
66
Understanding when & how to use Bridge Loans (before you are in a
situation when you absolutely need one) is an excellent way to
broaden and diversify your overall real estate investment strategy.
These unique financing tools are another specialty scenario only
solved by Hard Money Loans.
Foreign Nationals & Foreign Companies
If you’re not a US citizen, you’re pretty much out of luck when it
comes to securing most traditional bank mortgages.
Even if you are a US citizen, but prefer to acquire & own properties
through your own foreign corporations or subsidiaries, you’re going
to have a tough time getting a bank loan to fund that type of deal.
At Glassridge, we specialize in helping Foreign Nationals & Foreign
Corporations secure Hard Money Loans to acquire properties in the
USA. Whether you’re looking for short-term Fix & Flip Loans or long-
term Buy & Hold Loans, a Hard Money Lender is going to be your
best bet for financing your US-based real estate investments.
Low-Doc and No-Doc Loans
Banks are well known for their abundance of paperwork, only
exacerbated by their strictly regulated environment full of red tape.
Bank loans are document intensive, requiring many types of
background information, tax documents, proof of income, credit
reports, appraisals, insurances, and more, a collection that takes
enough time to gather in some cases that the delay can wreck a deal.
If you’re looking for a more streamlined Low-Doc or even No-Doc
borrowing process, there’s no better option than a Private Hard
Money Lender. To achieve the highest level of No-Doc Hard Money
Loans, you’ll typically need to either be an exceptionally well qualified
Borrower, or have a pre-existing relationship with your Lender,
however we’ve even closed on loans that required just a bank
statement for proof of funds, and the property address!
67
Not every type of Hard Money Loan is available with that minimal
level of documentation, but it’s nearly guaranteed that every Hard
Money Lender will have significantly less strict & easier to navigate
documentation requirements than any traditional bank lender.
Maxed Out Traditional Mortgages
When it comes to FHA insured mortgages on 1 – 4 unit properties,
everyone maxes out at about 10 (sometimes less). This includes your
personal residence(s), as well as any properties you hold under
companies in which you’re the majority owner.
If you’re building a rental property portfolio with many Single Family
Residences and 2 – 4 unit multiplexes, you’re going to max our on
traditional mortgages pretty fast. Especially if you have good credit,
decent stable income, and focus on immediate positive cashflow on
your rental properties, you should be able to max out your traditional
mortgages in 3 – 5 years at most.
After that, if you want to continue using leverage to build your rental
property portfolio with more 1 – 4 unit properties, Hard Money Loans
are almost your only option! While some banks might issue non-
FHA insured mortgages on these types of properties, you’re almost
guaranteed to find better terms & rates, faster closings, and simpler
documentation processes by going through HMLs.
Higher Leverage Investment Strategies
If you’re looking to build an investment portfolio, or Fix & Flip
business, with as little of your own cash as possible, you’ll be looking
for higher leverage than most banks will be willing to offer. Indeed,
even most Hard Money Lenders will shy away from deals that exceed
75% - 80% LTV.
However, there is a whole niche of Hard Money Loan products
specifically geared toward high leverage investment strategies. These
are usually more easily available in hot local markets to highly
qualified Borrowers, and if you fit these characteristics you might be
68
able to borrow as much as 90% of the Purchase Price and 100% of the
Rehab Costs. There are even HML products that calculate these
numbers based on the After Repair Value of the property, meaning
you can pretty much do a deal with as little as 5% - 10% of the total
cost.
Again, these high leverage strategies won’t be attainable for everyone,
but for experienced investors with hot deals in sellers’ markets, you
can almost definitely minimize your own capital requirements by
employing high leverage investment strategies with Hard Money
Loans.
Corporations & LLCs
While on some types of loans, for certain types of properties, it’s
possible to get even an FHA insured traditional mortgage, this is far
from guaranteed. Indeed, there are many situations where, if you
intend to purchase & hold your real estate using a corporate entity,
many banks will be difficult if not impossible to close on funding.
Owning your property under a corporate entity (Foreign or Domestic)
provides numerous benefits, from liability protection, to improved
privacy, to better tax flexibility. If that’s your strategy on a specific
deal, and this is making it more difficult to secure traditional bank
financing, Private Hard Money is the solution.
Many or even most Hard Money Loans require the property be held
in a corporation or LLC (as opposed to being owned directly by the
Borrower under his/her own name). By using this strategy, which also
yields significant benefits to you as the real estate investor, you will be
significantly improving your ability to close on a Hard Money Loan,
while also limiting your bank loan options.
Partnership Buyouts & Takeovers
If you currently own real estate in some type of partnership (General,
LP, LLP, Inc, or LLC), and you are looking to separate from your
partners in a benevolent change of direction or hostile takeover, good
69
luck explaining the situation to & closing on financing from your
banker.
Indeed, few if any traditional bank loans and mortgages will offer
flexible enough terms & execution conditions to close on even a
friendly buyout. Financing a hostile takeover of a real estate portfolio
or partnership with traditional bank financing is practically
impossible.
Private Hard Money Lenders, on the other hand, are generally much
more flexible and able to consider deals on a case-by-case personal
basis. Many bankers from the old school rue the day when banking &
lending became a corporate, rather than personal relationship based
business. Today, for real estate investors, the Hard Money Lender can
fill this void.
If you’re looking for any type of flexible real estate financing that
seems difficult if not impossible to attain through a traditional bank
lender, a Private Hard Money Loan is almost always the better (if not
only) choice.
Return to Navigation Menu…
70
Img via: Chris Peeters
GUARANTEE YOUR LOANS
CLOSE FAST One of the biggest potential advantages of Hard Money Loans when
compared to other forms of real estate financing is their speed.
If you already have an existing relationship with your Private Hard
Money Lender, on some types of deals you’ll be able to close in as
little as 24 – 48 hours! More generally, Hard Money Loans typically
close on a 7 – 14 day timeline from initial request to completed
funding.
While Hard Money Loans are known for their ability to close fast, that
by no means guarantees your loan will close quickly. There are several
key detail your Lender will likely need to see, and by being prepared
before ever even applying for financing, you can help guarantee your
loans close fast.
Here are several tips There are a variety of
71
Be Accurate In Your Property Valuation
Estimates
One of the biggest road blocks that persistently rears its head to derail
a Hard Money Loan’s quick closing is an inaccurate valuation.
Whether you’re trying to make a property seem more valuable than it
really is, you whipped together some quick comps & neglected
important details, or you simply didn’t do your homework and made
up a too-rough ballpark estimate… inaccurate property valuations will
hurt your chance to close on a loan at all, and will definitely cause
delays.
More importantly: bad property valuations won’t fly with any
reputable Lender!
Keep in mind, while most Lenders are not so tuned in to the realities
found on the front-lines of real estate investing, they are experts in
research & analysis of deals. Your Lender probably pulls
hundreds of comps a day, and can estimate a property’s
valuation with similar (or even better) accuracy than you
can.
Be accurate, honest, and candid in your property valuation estimates,
and take the time to do your homework before bringing these
numbers to your Lender, if you want to ensure the deal closes fast,
with as few hiccups as possible.
This Includes Your Evaluation Of Current
Condition And ARV
The biggest challenge on assessing value for deals that require
renovation & rehab is determining the Current “As Is” Value and the
After Repair Value (ARV). There’s a few reasons for this, some of
which your Lender will be more understanding about, others which
can easily delay or even wreck a closing.
72
First of all, considering the Current Value (CV) in As Is condition will
naturally be difficult until you’ve had a chance to perform Appraisals
& Inspections. This is typically part of the closing process any Lender
will likely require, so there is a bit of flexibility in your pre-Inspection
As Is Valuation. Do your best to assess the value honestly, based on
the comps and ballpark estimated repair costs.
The trickier Valuation that can slam the brakes on any Loan is a bad
estimation of After Repair Value (ARV). Obviously, there’s some
incentive for the Borrower to over-estimate or inflate the ARV to
make the deal look more potentially profitable. But remember: your
Lender probably pulls hundreds of comps a day, and can
estimate a property’s valuation with similar (or even better)
accuracy than you can. In that sense, it’s much better to slightly
under-value the ARV to paint a more conservative, realistic
investment picture, since your Lender will do the same anyway.
In general, as with most of these tips to close fast, the keys are
honesty & candor.
Be truthful & up-front with your Lender, and your entire closing
process will be smoother & faster.
Be Forthcoming In Explaining Recent
Transactions
Another key to closing fast that is closely linked to Valuations is
understanding recent transactions. Whether the property has recently
changed hands among multiple third parties, or if the Borrower
already acquired it recently and is looking to cash out or refi, these
recent transaction details are important to disclose to your Lender
early on, as it will likely eliminate certain loan options and naturally
point toward others.
73
Explain Rapid Resales And Increased
Valuations
One of the most important factors that can derail your financing if not
disclosed is multiple recent transactions and/or recent increased
valuations. Whether a property has recently been resold at below
market values (indicating a distressed situation), or whether it’s
benefited from increased valuation via improving market conditions
or renovations, Lenders will be wary of properties that exhibit a
volatile history.
A common example is when a Borrower purchased a property at a
very low Purchase Price, and has already finished the rehab &
renovations, so wants to borrow against the current After Repair
Value. Another example is when a Borrower is planning to purchase
an already rehabbed property from a flipper for a Buy & Hold rental.
If that property was worth 70% less than its current value just 6 – 12
months ago, it is worthwhile to disclose that to your Lender early on
to avoid headaches & delays later (because your Lender definitely will
find out and ask about it).
Disclose Non-Arm’s Length Transactions
Another similar factor to recent rapid resales and increased
valuations are Non-Arm’s Length Transactions. In other words:
properties bought and sold among family or business partners.
Ultimately, Private Hard Money Lenders are not too concerned with
these types of transactions in any meaningful distinguishing way. We
look at the deal & the borrower, and if both are legit, then we
absolutely want to close on your loan. However, these Non-Arm’s
Length Transactions, when compounded with other potentially
negative factors, can add up to some concern on your Lenders’ part.
That’s why, while it probably won’t be a big deal, it’s still worthwhile
& important to disclose Non-Arm’s Length Transactions to your
Lender up-front, since it will seem much more suspicious if
74
independently discovered by your Lender later (therefore resulting in
delays).
Be Mindful Of Your Cost Of Capital
When Shopping The Deal
Since your Lender wants you to be successful (and be able to afford to
pay back your Hard Money Loan), it’s important to take into account
your Cost Of Capital when shopping for financing. Put simply: if your
Cost of Capital is going to leave you little to no net ROI, your Lender
might not be willing to take the risk even if you are!
Different types of real estate financing have different ballpark costs
associated with them, including variations in:
Appraisal & inspection costs,
Insurance costs,
Closing costs & taxes,
Loan origination fees, and Loan interest rates.
Taking a realistic & informed approach to your ROI calculations,
including accurate estimates of all your Costs of Capital, will help
ensure a fast & streamlined closing.
Costs Of Alternative Capital: Fees, Points,
and Annual Interest Rates
Similar to traditional bank mortgage loans, Hard Money Loans have 3
main costs associated with them:
Fees.
These are fixed costs, usually largely if not wholly used to cover
costs of important steps in the closing, like attorney & title fees,
escrow, inspections, appraisals, BPOs, and other bureaucratic
75
necessities.
In general, they’ll range from $500 - $5,000, depending on the
type of property, deal scenario, location, and lender policies.
Points.
Points refer to the percentage of the total loan amount charged
as an Origination Fee, which will be due up-front at closing. It is
a finance term (similar to Basis Points or BPS, which mean
1/100th of a percent, or .01 Points). This is a relative cost which
is going to be determined as a percentage of your total loan
amount, usually including both acquisition & rehab financing.
Depending on the type of loan, property type, location, and your
qualifications as a Borrower, most Hard Money Loans will cost
from 1.5 – 6 Points up-front, due at closing.
This is a crucial factor to understand, as without this
Origination Fee and your down payment liquid, in the bank,
ready to go at closing, you won’t be able to secure any financing!
Interest Rate.
An Interest Rate is the amount charged over the loan duration,
noted as a percentage and usually calculated based on an
annual rate. In essence, the Interest Rate is what you pay to
“rent” or temporarily retain access to & control over the loan
amount.
The inner workings of Interest Rates are beyond the scope of
this section, but we’ll briefly consider the 2 main types of
Interest: Simple & Compounding. Most Hard Money Loans will
be the latter (typically compounding monthly), but you’ll need
to be aware of exactly how this is being calculated by your
76
Lender to accurately forecast your Cost Of Capital expenses.
o Simple Interest is, naturally, the simpler option. It
charges one fixed amount of interest based on the total
period of the loan, and doesn’t take into account the
unpaid balance and accrued interest. Its formula is very
straightforward:
Simple Interest = P (principal) * r (annual interest rate) *
t (years)
In other words, on a $100,000 loan (P) at 10% annual
interest rate (r) held for 9 months (t), you’d owe $7,500 in
total interest ($100,000 * 10% * 9/12).
o Compounding Interest is a bit more complicated, and
also will yield a bit more expensive result (especially on
longer term loans), because interest is charged on the
principal (P) plus the accrued interest from the previous
months. The formula is:
Compound Interest = P (1 + r/n)nt
Where: P = Principal, r = annual interest rate, n = number
of times interest is compounded per year, and t = the
number of years. On that same $100,000 loan (P) at 10%
annual interest (r), compounded monthly (n) and held for
that same 9 months (t), we’d be looking at $7,754.92 in
total interest ($100,000 * (1 + 10% / 12)12*9/12).
In general, and to make your life simpler, you can just
find out how your Lender is calculating interest, and then
use your favorite online loan calculators or offline
spreadsheet formulas to determine the total amount of
interest you’ll pay.
77
When you combine these 3 Costs of Capital: Fees, Points, and Interest
Rate, you’ll be able to sum them and find your total Cost of Capital.
Once you have this number, you’ll now know your true total expenses
you’ll be paying to the Lender to take that loan.
Armed with accurate expense numbers for your loan, you can also
calculate the true APR (Annual Percentage Rate) which would be the
total annualized Cost of Capital including all rates & fees.
For one last example, we’ll consider the same $100,000 loan at 10%
annual interest, compounded monthly, held for 9 months. Let’s also
assume there will be a 3 Point Origination Fee, and other up-front
administrative & closing costs totaling $2,295.
That means our Total Cost Of Capital is going to be: $2,295 closing
costs + $100,000 * 3% origination fee + $100,000 * (1 + 10% /
12)12*9/12 annual interest rate, compounded monthly, or simplified:
$2,295 + $3,000 + $7,754.92 = $13,049.92
While that’s obviously about 13% of our total loan value, considering
incurring those expenses in only a 9 month timeline, the APR
annualized would actually be ($13,049.92 / $100,000) / (9/12) * 100,
or 17.3% total!
These numbers are not atypical for Hard Money Loan costs, so it’s
important to calculate out your expenses accurately to understand
your total Cost of Capital & be sure the deal still makes sense even if
you have to pay a high rate to successfully secure the financing you
require.
Be Aware Of The Property’s Title
Situation
A “cloudy title” with liens, judgments, or encumbrances can be a real
pain to actually get to closing. The sooner you can uncover these types
78
of issues, the better. If you can discover them before your Lender
does, and disclose them when you’re first applying for financing, all
the better still!
Because if your Lender finds out about a property’s cloudy title
situation only at or just before the closing, you can bet the deal is
going to begin unraveling fast. Indeed, you’ll basically be put back
several steps, forced again to chase after current owners, lien holders,
or other entities to collect documents or resolve financial matters
among 3rd parties.
Running a cursory title search on a property you’re considering
acquiring, and being aware of its title situation so you can disclose
this to your Lender early on in the loan process, will be great steps
toward a faster, smoother closing.
Be Clear About Borrower(s),
Guarantor(s), And/Or Partner(s)
Anyone who is legally involved in the transaction on the Borrower
side must be disclosed. This is probably a no-brainer, but mostly gets
overlooked when either:
a) A property is being purchased or refinanced in an
LLC with a silent / minority partner.
Depending on the ownership share of the partner(s) in the
entity, it might actually be possible not to disclose them and still
qualify on a variety of specialized Hard Money Loans. However,
there are many loans that require full disclosure, and either way
it’s better safe than sorry. Remember to disclose all members of
your corporate entity that will be borrowing the loan and/or
holding the property, even if they’re silent partners or holding
79
small minority shares.
b) A Borrower forgets or does not initially intend to
have a 3rd party Personal Guarantor.
Sometimes a family member, business partner, or close friend
might not be included on the actual corporate entity
documents, but is willing to sign on as a Personal Guarantor to
help the Borrower get better terms & rates. If you’re remotely
considering using a Personal Guarantor to help boost your
credit-worthiness, it’s a smart choice to disclose this to your
Lender early on, because it might also open new options that
you otherwise would not learn about.
Neither of these are going to be definite deal breakers, but chances
are they’ll come up during the loan closing process sooner than later,
so it’s easier to disclose them early on yourself and ensure a smooth &
quick closing with the Lender.
Be Honest & Candid About Your Income,
Credit, And Collateral
This one should hopefully be one of the most obvious, but being
truthful & forthcoming about your own financial situation as a
Borrower is crucial. Beyond easily discovering any missed details
about the property itself, identifying potential short-comings with the
Borrower is every Lender’s primary expertise.
Not every Hard Money Loan will require disclosure of your Income,
Credit, or Collateral (beyond the deal itself), but most will. Being
ready with documentation on all of the above (proof of income, tax
returns, recent credit reports, records of other assets owned, etc) will
definitely help expedite the loan closing process.
80
One simple tip for serious real estate investors who want to close fast
is to keep all of these documents in a digital scanned format on your
computer, in one easy-to-find folder, so that you can rapidly share
them with potential Lenders whenever requested.
Be Realistic In Your Exit Strategy &
Timeline
The last detail that will be necessary to ensure your loans close fast is,
naturally, your exit strategy!
Since every Lender wants to be sure you’re going to pay back the loan,
and most Hard Money Loans have a balloon payment due at the end
of the loan, or after a certain period, being realistic and accurate in
your exit strategy & project timeline is crucial.
The most obvious scenario where an exit strategy takes central
importance is in a short-term Fix & Flip Loan. This type of financing
is usually for at most 12 months, at which time the entire balance of
the loan comes due all at once. You’re expected to have either sold the
property, or refinanced with a longer-term loan, before that 12 month
deadline (or you’ll usually be paying some hefty penalties, like 1% -
2% interest per month!).
Since all types of loans are all about access to money now, to be
repaid over time, it should be apparent that an accurate timeline
matters. Your Lender is looking at hundreds of similar loan scenarios,
and can recognize aggressive vs. conservative project timeline
estimates. It’s better to err on the side of caution when sharing your
work plans, because the more aggressive a stance you take, the more
your Lender will require proof of your qualifications & track record.
Regardless of whether you’re comfortable with very fast turnarounds,
or are more cautious with your timelines & exit strategy, it’s
important to be realistic & honest with your lender about the
situation from day one to ensure your loans close fast.
Return to Navigation Menu…
81
Img via: Duisenberg – CC-BY-SA-4.0
GET THE BEST POSSIBLE
LOAN RATES
Put More Skin In The Game (Lower
LTV)
One of the easiest ways to improve your rates & terms is to put more
skin in the game and borrow at a lower LTV.
This type of tactic does not have any one-size-fits all formula. On
some smaller loans, you’ll need to keep a relatively high LTV just to
borrow enough that your lender is motivated. If you’re only
borrowing $70k for a SFR Fix & Flip, lowering your LTV is probably
not going to save you much money, and not generate much
excitement in your lender.
However, if you are looking to get a better rate on a bigger loan, you
can probably save a lot by reducing your LTV from the 80% - 90%
range down to the 50% - 60% range. In some cases, you can probably
save a bit more still, but there is definitely a law of diminishing
returns with this tactic. You’ll probably not save much more by
82
reducing an LTV from 50% down to 10%, but it’s always worth
negotiating (or at least asking).
Finance Bigger Deals
Your lender gets paid when you get paid. It’s our job to sell you the
loan.
The bigger you profit, the bigger we profit. The bigger your deal, the
bigger your loan, and the bigger the potential ROI on the table. If you
are capable, confident, and qualified to do bigger deals, your lender
will be the first to support you.
Obviously there’s huge risk of getting in over your head, and of course
your lender will be thinking the same. So be open & honest with your
assessment of your readiness to move on to bigger deals. A great place
to start if you’re not quite sure is speaking to a lender who has
experience in the type of transactions you’re considering. We fund all
types of deals up to the hundreds of millions, so would be happy to
discuss your goals!
Build Your Credit Between Loans
Carefully monitoring your credit score is a helpful tool to any a
successful real estate investor. If you’ve closely monitored your credit
while doing deals & taking on multiple loans on multiple properties,
you’ve also seen your credit score yo-yo up and down somewhat
dramatically.
We’ve seen Borrowers move from the 800s to the 600s in a matter of
months, just due to paying off balances, taking on new balances, hard
credit pulls shopping around for loans, and other totally neutral
activities that make it onto the credit report (no late payments or
other negative remarks whatsoever).
If you’re planning on taking on more real estate loans, it would be
worthwhile to start actively building your credit at least 3 – 6 months
in advance, and carefully avoiding things like hard credit pulls, late
83
payments, >50% balance on unsecured lines of credit, delinquent
accounts, or accounts closed.
Ironically, paying a loan off on time tends to drop credit scores, since
you have one less account open, less credit available, and/or less on-
time payments.
To get the best real estate Hard Money Loan rates & terms, it is
important to plan your credit scoring activities accordingly.
Become A Repeat Borrower
As in any business, 80% of your Lenders’ income comes from 20% of
their Borrowers.
That’s because those Borrowers are long-term, consistent investors
who take out dozens or even hundreds of loans over the years, and
keep coming back to that same Lender. Not only are repeat Borrowers
guaranteed to close faster, since your Lender already knows you &
your details, repeat Borrowers get perks unavailable to anyone else.
At Glassridge, we’re always looking to reward our repeat Borrowers in
any way possible, from surprise gifts, to pre-paid vacations, to better
& better loan rates. Since we invest heavily into automation, we’re
already able to process large volumes of even complex loans for first-
time Borrowers.
For our long-term repeat Borrowers, the Pre-Approval & Closing
process can become so streamlined & efficient, that we’re happy to
pass these savings along to you in the form of significant discounts,
especially on Loan Origination Fees.
The more loans you take with your Lender, the better rates & terms
you’ll be able to access.
Actively Participate In The Borrowing
Process
84
Closing loans is complicated, and has a notable hard cost. From 3rd
party fees, to payroll for qualified US-based financing specialists, to
admin, legal, and risk management overhead, making sure your
financing is ready to close when you are involves a complicated web
of cooperation.
By taking a more active role in the borrowing process, you can help
demonstrate to your Lender that you’re not just an average Borrower.
Some easy ways you can make your Lender’s job easier, incentivizing
them to pass those savings on to you (especially as you become a
repeat Borrower), include things like:
Proactively gather and share important documents in
easy-to-reference digital formats.
This would include PDFs or similar of things like: tax returns,
proof of income, credit reports, details on other assets owned,
specific property info, comps, work estimates, pro formas,
P&Ls, rent rolls, and more.
The more experienced you become at closing a specific type of
Hard Money Loan in your local market, the more of an expert
you’ll become on exactly what documents your Lender needs.
By being proactive in organizing & gathering them, you’ll
ensure a faster, better result.
Follow up with your Lender regularly from Pre-
Approval to Closing.
You can guarantee your Lender is reviewing dozens or even
hundreds of loans at any given moment. From chasing other
prospective Borrowers, to other Lenders & Underwriters, to
Appraisers, Title Companies, Attorneys, and more, your Lender
is always busy with a lot on their plate.
By actively participating in the borrowing process by regularly
85
following up with your Lender (as opposed to waiting for them
to follow up with you), you can demonstrate that you’re a
proactive investor who’s serious about closing on the deal.
Check in with your Lender after the deal closed, before
you’re shopping the next one.
Once a deal closes and the Investor gets funding, there is
typically a gap in communication. This makes sense, since the
closing process is stressful & intense, so everyone’s ready for a
break once things finally settle.
However, you can be sure you’ll stand out if you follow up with
the Lender 2 – 4 weeks after closing, to find out how things
went on their end. Usually these roles are reversed, with the
Lender checking in on your deal & your progress.
By deviating from the norm, you’ll significantly stand out from
other Borrowers, giving you greater leverage for getting better
rates on future loans.
While there might be some difficult or impossible to adjust terms &
conditions set on your first few loans with a Lender, as you build the
relationship over time with multiple successful deals together, your
ability to actively participate in the Borrowing process will be noticed.
Refer Other Borrowers To Your Lender
One of the best ways to get a discount on your next loan is to refer
other Borrowers to your Lender!
As a real estate investor, you likely know other investors & potential
investors who could use a flexible Private Hard Money Lending
source. Once you’re confident in your own Lender’s credibility, they’ll
definitely appreciate your referrals.
Indeed, at Glassridge, about 60% of all our business comes from
direct referrals.
86
Referring other Borrowers to your Lender doesn’t have to stop at just
getting you better rates. Most Hard Money Lenders also pay referral
fees and are happy to work with 3rd Brokers (who can set & charge
their own fees).
In other words, you might not just save money: you could turn
referrals or even Brokering Private Hard Money Loans into another
low-overhead profit center for your real estate investing business!
Return to Navigation Menu…
87
Img via: Michael Gaida
Conclusion & Special Offer By reviewing this Guide & researching what we do here today, you are
officially a part of the Glassridge Insiders.
This has been the first step toward a game-changing financing
alliance with us.
The next step is not so simple:
Actually close on a deal with a Hard Money Loan from Glassridge!
As the Real Estate Investor’s Lender™ we’re here to make it as
quick, easy, and attainable for you to close on profitable financing, do
more deals, and grow your real estate wealth.
We want you to get out there and do more deals, make more money,
and keep coming back for more.
That’s why, as an added incentive to get the ball rolling, we offer the
following:
88
Special Offer: Save 25
BPS On Your 1st Loan! That’s right: when you close on your first Hard Money Loan with
Glassridge, you’ll save 25 Basis Points (0.25 Points) off your total loan
value.
That’s 0.25% off your total cost of capital on your next deal.
That’s $500 saved on every $100k of financing.
That’s $5,000 off the total cost of a $1m Hard Money Loan.
These 25 Basis Points will be subtracted from the Loan Origination
Fee, meaning you’ll realize the savings immediately at
closing.
This deal won’t stay around forever. We reserve the right to
discontinue it at any time.
To take advantage of this Special Offer and save hundreds, or even
thousands off your first loan with Glassridge, the first step is filling
out our quick, online 2 Minute Pre-Qual.
Get Started Here:
Quick, Online 2 Minute Pre-Qual
Or simply contact us directly, and remember to mention the 25 Basis
Points OFF offer:
888.995.4544
