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Flip Houses By Getting Money from A Private Lender! Team Thayer #realestate #investing #flipping #fliphouses #housing #oregon
For some of us, it can be intimidating and downright awkward to ask for money. In the real estate business, however, leverage cannot be ignored as a way to generate much better and faster returns than using all “cash.” Have no fear, because private lenders WANT to hear from you, we want to lend to you, and we want YOU to make money, because that’s how we make money. Most savvy private lenders will ask for information that can help us determine whether financing your property is a good investment for us. You can speed up this decision, or underwriting process, by having certain things ready when you call to request a loan. In order to determine funding, a private lender may ask for the numbers on the deal, your investment portfolio, “skin in the game,” market knowledge, and your primary and secondary investment strategies.
Show Us the Numbers!
The most important number to an asset-based lender is the loan to value (LTV) percentage. Each lender defines “value” differently for these purposes, so it is important to ask whether the lender uses purchase price, appraisal value, after repair value (ARV), or a combination of these to determine the LTV. At Key Relations, we base our LTV on the appraised value of the property to be secured, and we also consider ARV when considering loans for a rehab. In addition to the value of the property, most lenders will ask for the financial projections of your property based on your planned investment strategy. Be sure to provide any pertinent information for your primary and secondary strategies, including all projected income and expenses, to include repair estimates, carry costs, market rent rates, sold comparables, net operating income, ROI, and everything else that factors in to your profit. The more detailed and precise you are, the better.
Private lenders closely guard their level of risk on an investment, and one way to mitigate risk is to lend to experienced real estate investors. We want to know which markets you have experience in and which strategies you excel with. Having a prepared portfolio of your investing career can demonstrate a reduction in risk to a private lender. If you’re just starting out, that’s ok, too. Be prepared to tell us how you plan to mitigate that lack of experience, like bringing on an experienced partner or contractor, for example.
“Skin in the Game”
Would you invest in a deal where the sponsor is not contributing money? What’s to stop that person from walking away and leaving you with an underperforming property? Having some of your own money invested, or “Skin in the Game,” is important to show good faith to the lender that you believe in your deal. This does not always have to be in the form of a large down payment, and at Key Relations, depending on the LTV, we can provide funding for 100% of the purchase price. “Skin in the Game” could be a down payment, earnest money, equity from a cross-collateralized property, cash reserves for repairs and carry costs, or something else that is appropriate to your individual situation.
Comprehensive knowledge of your market is one way to overcome a lack of experience and is equally essential for experienced investors. Some things you should know about your market include micro and macro appreciation rates, major industries, major employers, median income, new permit applications, and businesses that are coming and going. Lots of valuable market research can be accomplished by a visit to your city’s Economic Development Council. Be sure to use your market knowledge when explaining to the lender why your chosen strategy will work in your market.
Private lenders want to know how you will repay your loan, so we need to know your primary and secondary investment strategies. The primary exit strategy is your plan to create value out of the property based on market demand. Will you fix and flip, buy and hold, assign, lease option, or something else? Just like smart stock traders that have two exit strategies, a stop and a limit, we want to know you have a secondary exit strategy. If things don’t go to plan, what is your secondary strategy? Will you refinance, sell, or do you have a contingency in the contract? Be sure to back up your strategies with market evidence like occupancy rates and average Days on Market.
We are dedicated to helping you get your deals funded, and we want you to succeed. Preparing the information a lender asks for ahead of time not only helps us speed up the evaluation process of your loan request, it should also elevate your level of confidence in yourself and your deal.