Leveraging Hard Money Loans Successfully in Houston
Hard money loans are a great funding source available for real estate investors in Houston. Whether you want to flip a house or finance any other real estate project, you may consider going for one. However, hard money loans also come at a higher cost. This is why you should be mindful of how to use hard money loans strategically. If you can do it right, you will be able to maximize your returns. Here are some valuable tips that can help you start leveraging hard money loans successfully in Houston, Texas.
Have a Clear Exit Strategy
Hard money loans should be used as short-term financing to fuel projects that will be quickly resold, refinanced or otherwise exited within 6-12 months. Savvy Houston investors have a well-defined end game to either flip the house for a profit or qualify for longer-term permanent financing once repairs are made to pull out their capital and reduce high borrowing costs. Playing the long game with hard money debt will eat away profits.
Secure Deep Discounts on Purchases
The key to prevailing despite hard money loans’ higher rates and charges is buying properties at sufficient discounts so healthy margins can still be realized. Houston’s extensive inventory of distressed homes provides these opportunities. Investors should target deals priced at least 25-30% under fair market value so adequate equity exists to leverage hard money lending but still earn strong 15-25%+ ROIs based on rehab/resale potential.
Borrow As Needed, Not as Allowed
Just because a private lender offers you up to 80% loan-to-value financing at attractive terms doesn’t mean you should max it out. Every extra dollar borrowed cuts into eventual profits. Determine how much hard money funding is truly required to successfully execute your project then resist the urge to over-leverage the deal. This fiscal discipline contributes significantly toward overall success.
Build Lasting Lender Relationships
Hard money lending is largely relationship-driven. Building trust and loyalty with providers over multiple transactions is key to securing favorable terms and larger loan amounts to pursue bigger redevelopment projects. Experienced rehabbers are often privy to proprietary off-market deals and favorable rates since they are viewed as responsible borrowers with a proven system for repayment. Those looking to scale their house flipping business should cultivate strong ties to capital sources.
Perform Due Diligence Upfront
While hard money loans have less stringent qualifying criteria compared to conventional mortgages, borrowers still must demonstrate their deals are financially sound with adequate equity, useful market comps proving realistic end value and sensible scopes of work. Lenders complete full due diligence just like other major financing decisions. Come prepared with comprehensive documentation that proves out the numbers to build confidence.
Have Contingency Backup Plans
Not every rehabilitation goes 100% according to plan. Unforeseen issues can arise, timetables may shift, and projected budgets get exceeded. Experienced Houston investors always have contingency plans specifying how much extra time or cost overages can be sustained before the deal gets jeopardized and exit strategies may no longer pan out as modeled. Know your limits, then have clearly defined backup options ready to deploy in order to protect your investment and satisfy lenders.
Looking to invest in Houston Real Estate?
Follow these tips to get the most out of leveraging hard money loans. If you are ready to invest and are looking for a hard money loan in Houston, feel free to contact us at FlipCo Financial. As a trusted lender, we are committed to supporting the real-estate investors in Houston to make the most out of their investments.