If you are an investor in the St Louis market, there are several ways to fund your deals.
- Your own cash
- Equity line against your residence
- Loans from banks
- Loans from others (family, friends, etc…)
- Hard money loans
So why use hard money and what is hard money? Hard money is a short-term loan that is collateralized by a house or commercial property. The loan amount is determined by the after-repair value of an investment property. Typically, hard money lenders are comfortable with 60 to 75% of the ARV.
There many different scenarios where hard money can be a great strategy to fund deals: Flipping Houses and Renting Houses.
Flipping and Hard Money in St. Louis
Flipping has become popularized by many famous TV shows and is becoming a business for many investors across the country. It is a great way for investors to build capital and for real estate investors to create a regular income. Flipping is also very expensive.
Most investors are targeting properties in St Louis with a purchase price of $75,000 to $300,000. On top of a big purchase price most rehabs will cost from $30,000 to $80,000. A flip takes a lot of capital when you consider both purchase and rehab.
There are a lot of people who are passionate about real estate and never get started due to the capital needed from the beginning. Hard money is a great tool that can solve this start up issue for many people wanting to enter the real estate investing field.
When a flipper works with a hard money lender, they can fund their deal while needing no money of their own. For Example, with a hard money loan, a flipper purchases a house for $100,000. The flipper gets multiple contractor bids and realizes the house needs $50,000 worth of work to sell for top dollar in the current market.
Houses in the neighborhood that have nice renovations are selling for $250,000. The hard money lender can lend up to an ARV of $187,500. The flipper only needs funding for $150,000. When the flip sells the flipper will make a great profit. He was able to complete his whole project with no funds of his own!
Flippers who develop a strong relationship with their hard money lender can often have multiple hard money loans going at the same time. Meaning, flippers have the opportunity to generate more income and scale their business.
Building a Rental Portfolio and Hard Money
Building a rental portfolio is a great way to build passive income. Every rental an investor owns creates the long-term wealth of monthly cashflow and appreciation. Cashflow is the money left after paying out all expenses.
These expenses are typically the mortgage, taxes, insurance, vacancy rate, maintenance and repairs, capital expenditures, utilities, lawn service and any other expenses that are directly tied to the property. Appreciation is when the property continues to grow in value through the years. Investors looking to build a rental portfolio are utilizing the BRRR strategy.
BRRRR stands for Buy, Rehab, Rent, Refinance and Repeat. The BRRRR strategy is utilized by using hard money. For Example, an investor purchases a home using hard money for $80,000 and takes out an additional $20,000 for the rehab for construction disbursements. The hard money lender would fund the full $100,000 as long the after-repair value is in the 60 to 75% range most hard money lenders will lend up to.
Once the rehab is complete the investor would start advertising the house and showing the property to potential tenants. At the same time, the investor would be reaching out to their bank to start the refinance process.
Once the property is rented with a long-term tenant, a lease is in place and the property undergoes a bank appraisal then the refinance process can be executed. The investor will be able to pay off their hard money loan and have none of their own capital invested in this long-term asset.
In this scenario, hard money allowed the investor to buy a long-term asset that will build both short term wealth through cash flow and long-term wealth through appreciation.
Similar to the flipping example, an investor can start to scale their long-term business by using hard money to have multiple rental property projects going at once. Most investors see their rental portfolio start to make a positive financial impact on their lives when they have built up several properties and the cashflow they take in monthly has multiplied.
Rentals are an incredible investment. Most real estate on average appreciates 3% a year and if you purchase in a popular area then you can see much higher appreciation than 3% a year. Similarly, if you own 20 properties that have a cashflow of $300 per month then that’s an annual cashflow of $72,000 a year. Rental properties are an attractive investment because you are creating a long-term annuity that will financially benefit the investor and his family for the long haul.
Some markets, do not have cash flow like St. Louis does. Because property values vary so greatly, there are a variety of cash flow ranges and appreciation you can get. When you’re looking at investment strategies for rentals, get to know all the different parts of town, get comfortable with running cash flow numbers and build up a rental portfolio that meets your needs.
Real estate investing is a huge wealth opportunity. Many wealth building strategies are tailored towards the rich. Either you have to be an accredited investor to be able to invest or you have to know how to play stock markets safely yet aggressively. This can be really hard to pull off and performance is not in the investor’s control.
Markets are determined by many external factors and it can be hard to predict what is going to beat or perform at the market average. Real estate is a great growth strategy for both quick capital building of a flip and long-term wealth building of a rental. Hard money makes both wealth building strategies possible for anyone with the desire to pursue real estate.
Wondering if this might work for you?
If you are wondering if hard money lending is something that might work for your next deal give us a call to find out exactly how it works – (636) 223-4262 or fill out the contact form.
Article written by Arielle Morris, FasterFunds Lending Team Member of St Louis, MO