27 Jun The Best Seat at the Table: Lender Why being the bank is the best position in any deal.
Real Estate transactions have several participants seated at the closing table who are responsible for the success of the deal and that make a profit from the deal. If you were to sit down and figure the hours spent working on the project, and divide that by the profit received for each participant, you will find that the lender not only makes the most per hour, but they also hold the least amount of risk. Being the bank may not make your friends and associates get goose bumps when they drive by the house you are financing. However, when you measure the risk, time spent working on the project, and all that it takes to complete the deal, you will find that being the bank is by far the best position in any deal.
You may have noticed that the real estate market in the Carolinas is one of the top in the country. With the influx of millennials and our new- found diversification of jobs, we have attracted hundreds of new residents to our state each week. In turn, housing is exploding with new builds and rehabbed homes. These houses are being financed by an unorthodox lender called “hard money.”
What is hard money?
Hard money is a short-term, high-interest loan that allows a rehabber or builder to buy a house, fix it up, and sell it for a profit. Some will knock the house down altogether and build a new home on the “infill lot.”
Many people have money in retirement accounts, and unless you are earning at least 8% interest on your money, you need to consider being the bank. Investors need to borrow money from private lenders because banks will not lend all the money needed to buy and rehab, or build based on the after repaired value. Private lenders loan purchase money, but also lend funds to rehab the house as well. Investors are willing to pay premium interest rates because they get the funds they need to fully complete the rehab project. The terms are six to nine months long, so paying the higher rates is short-lived and makes sense to the borrower and lender. Borrowers calculate the higher fees into the deal and still can make a tidy profit.
The house serves as the collateral for the loan, so a savvy lender will lend no more than 70% of the after repaired value, making it easy to get the house sold quickly at a discount, and get their money paid back.
Remember, there are risks in every investment you make. Getting involved in your local Real Estate Investor Association such as MetrolinaREIA is the best way to learn how to make smart moves. To learn more about lending or being the bank, accredited investors can visit www.carolinacapitalreservefund.com or www.carolinahardmoney.com.