Using Private Money To Rehab Houses
For years, investors have been using private money to rehab houses
. They find it better than conventional loans offered by banks, credit unions, and other traditional lenders. Rehabbers have a sundry of reasons for tapping this kind of financing and here are some of them.The first is it lets them close deals with zero personal money. If you sought credit from traditional lenders, they will give you enough money to buy a property. In the case of rehabbers, this is not enough because apart from purchasing a cheap property, they also need money to fix and market it. They also need extra cash for closing and other unexpected expenses. While they have lower interest rates, traditional loans may not be enough for their needs.
That is why they turn to private money despite this kind of financing having higher interest rates. When you borrow money from private money lenders, you will usually get all the cash you need to buy a property, rehab it, and then market it. This is how it happens.
Private money lenders will give you money based on the amount of the collateral. In the case of rehabbers, the fixer upper home is used as collateral. Lenders determine the price of the fixer upper home in good condition and then will give you a percentage of that value, which is also known as the ARV (after repair value). The percentage used differs per location and lender although they commonly give between 60% and 70% of the ARV.
To better explain this point, see this sample computation. Lets say a fixer upper home in its current, dilapidated state is worth $50,000. However, in good condition, it can be sold for $100,000. You will need around $15,000 to repair and improve the property and another $5,000 for various expenses such as closing costs. All in all, your total expenses amounts to $70,000. If the lender gives you 70% of the collaterals value in good condition, or the ARV, you will get $70,000 from one loan. This means that you will be able to buy a property and rehab it without spending any personal money. Plus, you get to take home a $30,000 check for your work.
Compared to traditional loans, private money is also released fast. Also known as hard money, this financing is not hard to access and can be used even by borrowers who do not have good credit scores. If youre interested in this line of credit and how it can help you rehab houses or invest in real estate, visit REIwired.com today.
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