Dennis Dahlberg - It Can't Get Better Than This!

Friday, February 22, 2019

Loans for Flipping Houses: The Dangers of Hidden Costs

Hard money lenders are the go-to source for financing when it comes to flipping houses. These lenders overlook the distressed condition of a property while giving loans as a percentage of a property’s potential value, but it is essential to carefully consider the cost structure of any hard money deal.

Some hard money deals are structured in two parts. The first portion of the loan secures the purchase of distressed property and the second portion of the loan covers the cost of renovations. The rehab portion of the loan is often distributed bit by bit as work proceeds, and this has important implications when it comes to the cost of hard money financing. The following examples will show why it is crucial to analyze the terms of any hard money deal.

In the first instance, our prospective house flipper goes to a hard money provider and proposes a two-month rehab project. The cost of closing on the ramshackle home will be $80,000, and the cost of renovations will amount to $30,000. Our first borrower takes out a loan for a total $110,000 with the rehab budget given out in two successive draws totaling $15,000 apiece. The lender offers a standard hard money interest rate of 14 percent. Work proceeds on the house things go smoothly, and our flipper resells his home earning a handsome profit of $55,320.

It seems like things worked out pretty well in this case, or did they?

You can save money by carefully considering the cost structure of hard money loans

Another flipper sees a similar property sale a block away from our first. She must have been spying on the first borrower because her proposed project is the exactly the same. The purchase price of the house is $80,000 and the rehab budget is $30,000. This borrower approaches a different hard money provider. They agree to a loan of $110,000 with a $30,000 rehab budget distributed over two draws at a 14 percent interest rate.

Suspicious glances are exchanged between the two investors as they pass each on the way to their respective work sites. Let us assume they finish work at the same time, and they resell their properties at the same sales price.

But, for some reason, our second flipper earned a profit of $56,020 while the first earned $55,320. Why? Because the second flipper carefully considered the terms of her deal. What was the critical detail in the term sheet the first flipper missed?

The first lender charged full interest on the total loan amount up front through the whole two month period, while the second lender only charged interest on the money as it was given out in draws. This tiny detail saved the second flipper $700.

Don’t make unnecessary interest payments on hard money loans

This hidden cost of hard money is something that is often overlooked, and it could cost you thousands in unnecessary interest payments. In the context of a house flip, $700 might be a small amount of money.

Let's change the situation. What if our first house flipper's project went on for 6 months and they had to pay that 14 percent interest rate on the full loan amount? They'd pay roughly five thousand additional dollars in unnecessary interest payments. In the context of a flip, $5,000 is a lot of money.

Don't make interest payments on money you don't have. Carefully analyze the cost structure of your hard money deal. If you don't receive the full loan amount up front, ask your lender if they will charge you interest on the entire loan amount or just on the funds you've received from them. Analyze the terms of your hard money deal to avoid making unnecessary interest payments.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

How to Use an Arizona Bridge Loan to Get the Home of Your Dreams

An Arizona bridge loan can help homeowners as they transition between homes. This type of loan is a win-win if you want to move, have a buyer lined up, and your deal runs into unexpected difficulties.

Say you've put in an earnest offer on your dream home. The house is just everything. It has a pool, room enough for the kids, and separate space for an art studio. You made an offer on contingency because you've got a buyer lined up on your current home, but the deal just hasn't closed yet.

As the deadline to close approaches, you find yourself packing boxes, all ready for the money to come through, and then you get a call. It’s your buyer.

"Listen, I'm going to need another 60 days before I can get you the money. We've got a mold issue we need to resolve."

You then call up the current owner of your dream home, asking for a little more time, but they too are fully packed and ready.

They tell you, "Someone put in a full offer right after you. Maybe I'll just call them. It’s too much of a hassle to unpack my whole house again."

You ask for a week, and the seller reluctantly agrees.

You hang up, dejected and furious, certain that all hope is lost.

An Arizona bridge loan can help fuel the cost of your next move

Since your home hasn't sold, you don't have the money for a down payment on your next house. But, you realize you have about $100K in equity in your current home. You think, “Can’t I just borrow against that?”

You look up "bridge financing," and you learn that these loans allow you to cash out up to 90% of the outstanding equity on your current home. At first glance, the 12% interest rate makes you shudder, but you sense it might be your only hope, so you bite the bullet. The $90,000 in bridge financing is more than enough to make a down payment on your next home.

The process is fast enough that you don’t even need that extra week, and move into your new home the next day.

You put your bridge financing to work, making a down payment on the second mortgage on your dream home. You are a bit nervous, because basically, you have two mortgages at this point in addition to bridge financing.

The 60-day window passes. You nervously sit by the phone waiting for the buyer of your old home to call, and sure enough, they do. It seems they've got their act together. The papers are signed, the money comes through. The proceeds from the sale of your old house pay off your first mortgage and that $90K in bridge financing. Now you only have one mortgage.

And you live happily ever after in your newly secured dream home.

Don't let your move become a nightmare because of an unexpected difficulty. An Arizona bridge loan can help make your dreams come true.

The situation just described is a perfect example of when to use bridge financing.

The main risk with this type of loan is that you move from one home to another, but your former home doesn't sell, leaving you on the hook to pay off the bridge loan. However, if you have a firm assurance that your home is going to sell in a handful of months, bridge financing isn't such a risky proposition.

In short, don't let an unsold home keep you from purchasing the home of your dreams.

Dennis Dahlber Broker Ri CEO Level 4 Funding LLC Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO

Are Fannie Mae's Subsidized Arizona Commercial Real Estate Loans a Win-Win?

Fannie Mae recently began offering subsidized Arizona commercial real estate loans to property investors. Like any government program, there's a catch. If you take out a loan under this plan, half of all the units in your apartment complex must be priced for the "lower middle class.” You'll have to cap rents on 80% of your units. You might be wondering why you'd want to do something like that.

Rent caps could be coming to a neighborhood near you whether you like it or not. If you follow Fannie's guidelines, you'll get funding for up to 90% of your next property at a minuscule interest rate. This means you can secure your next apartment for next to nothing if you agree to earn next to nothing going forward.

Already across the country, local politicians are making vague speeches, full of mythical "teachers and firefighters who need affordable housing." Local politicians, with eyes toward the distant future, are intent on stopping the supposedly rampant rent increases.

The implication? You might be legally obligated to offer subsidized housing in the not too distant future. You might want to consider taking advantage of the Fannie program sooner rather than later.

Because more localities are mandating subsidized housing, maybe Fannie’s subsidized Arizona commercial real estate loans are a good idea.

It might be in your best interest to cap rents preemptively on your next investment property and board the subsidy train.

In the worst case scenario, you might purchase a shiny, class-A high rise with an expensive loan, under the presumption of rising rents. If city council erases your profit projections and restricts the amount of rent you can charge per unit, you’re out of luck. Who knows, you might default as a result of their new mandate.

In politics, you know that the ends justify the means. Local politicians need to play their part as middle-class champions, and if rent controls lend credence to their act, don't expect them to hold back. Sp, you never know if rent controls are coming.

But, what if rent controls don't come?

Taking advantage of subsidized Arizona commercial real estate loans could cost you.

If you check the political headwinds and determine that rent caps are a foregone conclusion, taking out a subsidized loan on your next investment property might be a good idea.

But what if there’s a change in the agenda? Say the city councilors decide they should let the market determine rent, causing rent to skyrocket. Taking advantage of the Fannie program means you won't be able to charge based on the market rate. As your fellow landlords enjoy rising profits, all you get is a lower mortgage payment. In the end, you want to make money, and preemptively limiting the amount of money you can make on your next investment property might not be in your best interest.

Then again, it could be a good idea. Taking advantage of Fannie Mae's program is a matter of your own discretion. Maybe you could decide by flipping a coin?

Thursday, February 21, 2019

How to Read Search Results for Arizona Hard Money Lenders

When it comes to finding Arizona hard money lenders, maybe you’re overwhelmed by your search results. Learn how to read between the lines of a lender’s web page so you can find the help that's right for you.

The first step in reading a lender is finding one first. Because it is the 21st century, Google "hard money…" and before you know it, you should have plenty of results. Make a list of potential lenders in your area, but before you read the lenders’ websites, read some customer feedback and cross lenders with negative or with little to no customer reviews off your list.

After narrowing down your list of potential Arizona hard money lenders, find lenders whose recent deals match your specific vision.

You've found several lenders who have decent customer feedback. Should you go ahead and apply? No, you've got a bit more reading to do to narrow your list further.

Check to see if your potential lenders have a list of recently funded deals. Do the properties match your vision? If you intend to flip a house, you should not approach a hard money provider who specializes in commercial properties. You want a lender who can offer insight when it comes to your specific project. Find lenders who specialize in funding your specific investment and then look out for some red flags.

When it comes to reading Arizona hard money lenders, don't ignore these red flags

• Read initial terms offered. Beware of pie in the sky deals. If a lender's initial terms are too good to be true, more than likely, they are. Avoid lenders whose conditions aren't anything close to what you've found on other hard money websites.

• Read the lender’s basic qualifications. If all that's needed to close your deal is your name and a handshake, be wary. Reputable hard money providers will at least glance at your basic financial situation. If a lender sets the bar so low that just about anyone can qualify, more than likely their only interest is in collecting your interest payments. Erase lenders off your list whose standards don't match the standards of other lenders.

• Read the lender’s website, but don't just look at the words. Is a potential lenders website well-designed, professional and appealing, or does it like it hasn't been updated since 1997? Cross a line through lenders whose websites are poorly designed and don't offer a lot of specific information.

• Read the lender’s physical location. If a quick Google search for "A2Z Hard money's," address reveals that their offices are located in a car wash in New Mexico, beware: you might end up laundering money for Walter White. Cross out lenders who don't have a physical office.

After following these steps, you should have a list of lenders who:

1. Have decent customer reviews.

2. Specialize in the type of project you want to pursue.

3. Have reasonable loan terms and borrower standards.

4. Have a professional website and a physical office.

You can perform all this due diligence from the safety of your laptop. Learning to read your search results for "hard money," will save you time and effort while protecting you from sheisters.

Arizona Hard Money Loans: A Win-Win for Your Cannabis Business?

Arizona cannabis business loans are hard to come by. So what if you run into a crippling business expense? The bank isn't an option, equity is expensive, and crowdfunding offers no guarantees. So how do you find the help that's right for you?

A hypothetical grower already has a dispensary lined up to buy his first crop, but then, the utility company raises his electricity bill, doubling his cost of electricity per kilowatt hour. Since it's his first crop, he's strapped for cash.

It is a catch 22; until his first crop comes in he won't be able to pay his electricity bill, but if he doesn't have electricity, he can't grow his first crop. He’s stuck between a rock and a hard place. He needs a quick injection of cash, a small loan which he can pay off in 70 days after his plants mature.

Let's assume he only needs $50,000 to cover the cost of electricity. Given his excellent credit score, he considers getting a personal loan from a bank first. All is well, but he hears a vague alert chime on the loan officer’s computer.

Without any explanation security officers escort him out of the building.

What are some other sources of Arizona cannabis business loans

Our poor grower isn't interested in selling ownership to an equity partner. Selling 10 percent of his business just to pay his electricity bill is not a reasonable proposition for him.

So, he eagerly makes his plea on Kickstarter. It's crickets from the peanut gallery, as his loan sits unfunded on the site. He can't wait much longer as his little seedlings will wither and die if he doesn't get money fast.

He hears from a friend about another type of alternative financing, one that might solve all his troubles.

Arizona hard money loans can help fuel short-term costs in your cannabis business.

He approaches a hard money provider. They offer him a loan on the condition that he pays it back in 120 days. He will also have to pledge his grow facility as collateral. The loan is a little expensive for his taste, but its either hard money or bust, so he goes ahead and closes the deal. The funding comes through in short order, and within 70 days his crop is in full bloom ready to be harvested and sold to a nearby dispensary.

With these funds, he's able to pay back his loan quickly, and he earns enough money to cover his utility costs until his next harvest.

Because he already had a buyer lined up and he knew exactly when his crop would come in, he didn't put much at risk by pledging his grow house as collateral. Hard money got him the funds he needed without having to sell ownership in his business or wait on the much over-hyped kick starter. If you are looking to "grow your business," and run into an unexpected expense, hard money can help.

Arizona Hard Money Loans: Tactics to Pay Less

Arizona Hard money lenders invest in risky deals that banks won't touch, like house flips. In browsing the terms offered by various hard money providers, the double-digit interest rates might shock you. Take a deep breath, as there are some tactics you can use to lower the cost of your loan.

You ask why the cost of hard money is so high.

• It is short-term: No wants to pay 14% interest on a $250,000 loan for five years. This high rate incentivizes you to pay your loan back as quickly as possible. But why do these lenders want their money back so quickly?

• High risk: Because of the risk involved with flips, there's no guarantee for you or your lender that you are going to make money. The high rate ensures the lender their going to make some return on their investment.

Because of the risk involved, hard money is expensive, but what if you could avoid paying such a high rate in the first place?

Tactics to pay lower interest when it comes to Arizona hard money loans

You can employ the following tactics to help you negotiate a lower interest rate.

• Find a lucrative, low-risk deal: The rule here is to find a house which you can secure at a low price and then assure your lender about its potential using comparable sales. For example, say you found a foreclosed house which you can get at a steep discount. The house might be selling for $150,000 while similar homes in the area are going for $300,000. A quick walkthrough reveals that it doesn't need much work. You estimate the cost of repairs will be about $15,000. The house needs a few repairs, and its resale value is backed up by hard data. These are some talking points you can use to negotiate a lower interest rate with your lender.

• If you have experience, talk about it: Given all the risk that comes with flips, lenders prefer those who have a proven track record of successful projects. Talking up your expertise or even offering your lender business in the future might help you get a lower initial rate.

But even if your hard money provider doesn't offer you a lower rate, here is a little rhyme that can help you

• Pay it back ASAP: Finish work in a few months and you can minimize the cost of your loan. Remember, you pay interest on a monthly basis, so if you finish work in a couple of months you reduce the cost of your loan, regardless of how high the initial rate is.

Don't let the high interest charged on Arizona hard money loans scare you out of the flipping business.

Hard money is really your only option if you want to flip houses. Almost every flip is funded by hard money, and on average every flip earns a tidy $30K in profits, even though these lenders charge double-digit interest rates. You can make hard money less expensive by negotiating a lower rate with the strategies above in addition to paying it back ASAP.