We have all heard “it takes money to make money.”
For those who are looking to get started in real estate investing this can be a bit challenging because we often don’t have any money when we are getting started. This is often solved by building a relationship with a lender of some type. Lenders can be traditional banks and credit unions, they can be bridge lenders or hard money lenders, or they can even be private money lenders. Private lenders are individuals, who may have capital available, and are looking for a return. Often the most effective private lenders are individuals, who have had some experience with real estate in the past, but no longer want to actively manage real estate projects.
Finding the right Lender can feel overwhelming, after all, at the end of the day money can be a stressful topic. That is why we put together a list of the top nine questions we at CLTBuyers ask money lenders before we begin working with them.
1. What is your experience with lending?
The goal is to work with an established lender that not only has built years of trust among its clientele but can also help give tips and tricks that will save you headaches and money down the road.
2. Do you have references from previous clients?
A lender with years of experience will not shy away from sharing testimonials and reviews from satisfied clients. Often the best relationships are built on referrals. Reaching out to a lender who has helped on other successful projects is a great source.
3. What is your current interest rate?
Want to know the overall cost of the loan? Now, this is the question to throw in. Interest rates are vital and a lender who’s done multiple deals should know the range of rates that match their desired profile. The cost of the loan should not be the only factor that determines which lender you settle for but it is one element that can be a strong determinate.
4. Is there a prepayment penalty?
Some lenders have a prepayment penalty, which translates to a minimum amount of interest being paid on the loan. It’s often a small amount. While the prepayment penalty doesn’t always affect borrowers it is important to know if it could apply to you so that you can account for that extra amount should this event occur. Like all things, this is certainly negotiable, but we need to ensure that we are clear with our lenders before the start of the loan.
As an aside, prepayment penalties aren’t permitted for most consumer-owned occupied loans.
5. How long will it take to fund the loan?
A lender who means business will do just that. They will fund a loan in a timely manner. Those who have fantastic books will even shorten the funding period to 3 or 5 days. Our experience is that most funding can take up to 10 days and that as long as your lender is diligent they can support this effort.
6. Does the lender have these funds in cash or are they in other qualified accounts?
While it may feel uncomfortable to ask such intrusive questions initially, you need to work through that discomfort. Lenders who are experienced should have no trouble being open with you about this point. It is important to understand this as it can affect how quickly they can fund a specific project and the paperwork that is required for that funding.
7. Are there any other fees involved for the hard money loan?
Everything should be known upfront. Some lenders may want certain expenses that they encounter to be covered as well. This may include a wire fee or some type of administrative fee with their account custodian.
It is important to clearly define these at the beginning of the loan. We often will list these amounts in the Promissory note so that there is no ambiguity about these amounts.
8. What loan to value are you able to offer?
The loan-to-value ratio (LTV) is the loan amount the lender will give based on the current value of the property. Each lender has its own LTV targets. LTV targets can vary based on the type of property, its condition, the intended use of the property, and the credit worthiness of the borrower.
9. What periods of loan lengths do you have available?
Everyone has a different timeline in their head. The loan period must fit within your budget and your schedule. Depending on the property, you might have to account for years of construction and work until you see a profit. Make sure you think out your exit timeline so that you can ensure payment during the loan period.
Working with a lender doesn’t have to be as stressful as you think it may be. Preparing and asking the right questions will make all the difference as you dive deeper into the real estate investing world. Want to get more helpful tips? Get in touch with us today!