Do you want to learn how to use hard money for residential real estate development?
First of all, let’s talk about hard money. Hard money is a short-term, asset-based loan, used by investors to purchase distressed residential real estate. This type of real estate investment is often called house flipping, and hard money loans are also called house flipping loans. Hard money real estate loans allow investors to quickly buy up, repair, and resell distressed properties. Although the rates may be higher than a 30 year mortgage, the loans are typically short term and well worth it.
Getting a good return on your investment, however, means that you need to know how and why to use hard money real estate loans.
Why Use Hard Money?
There are three primary reasons to use hard money when purchasing real estate for investment and development in Texas.
Hard Money Loans typically close very quickly, in 7-10 business days.
Hard Money Loans tend to give you more leverage and options in the real estate market.
Hard Money Loans are perfect for buying older properties that need repair. These properties typically don’t qualify for a conventional loan.
How to Use Hard Money?
Hard money real estate loans are unique in that they cover 100% of the costs needed to quickly flip a house, with little money down. Unlike conventional real estate loans, which typically cover up to 80% of the purchase price, hard money loans cover up to 70% of the ARV.
So, what’s ARV, and why is this a big deal? ARV is the After Repair Value, or what the value of the house AFTER the repairs. This leads to a much larger loan, which means you have the cash you need to hire someone to make the repairs.
Conventional Real Estate Loan Vs Hard Money Real Estate Loan
To better understand how to use hard money, let’s check out this comparison.
In this example we’ll use an old house that is going for $50,000. Investing $15,000 in repairs will put its ARV (After Repair Value) at $100,000.
Conventional Real Estate Loan
The conventional real estate lender will loan you 80% of the purchase price, $40,000. That still leaves you to cover the 20% down payment of $10,000. Plus you need to put up the cash for the $15,000 in repairs needed. That’s $25,000 out of pocket…oh, and we didn’t even mention the closing costs, which will probably run you several thousand more.
Hard Money Real Estate Loan
On the other hand, the hard money lender will loan you 70% of the ARV (after repair value), $70,000. This is more than enough now to cover the purchase price, $50,000, as well as the repair costs, $15,000. And, leaving you an extra $5000 to cover the closing costs on a $50,000 home.
A successful house flipper could turn this property over in about six months, generating between $20,000-$30,000 profit, assuming they have a good contractor, real estate agent, and hard money lender.
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