If you’re looking to do some serious real estate investing, you might be interested in using a hard money lender. While most homeowners go with conventional financing, a hard money lender can be more useful for buying and selling properties.
For those that haven’t been a real estate investor before, hard money lending may be confusing. Why is a hard money lender useful? And how do you identify good lenders?
Even if you’ve used a hard money lender before, how do you know you’re getting the most out of your hard money lender? Can they provide insight into today’s housing market
We’ll dive into hard money lending with Romney Navarro, CEO of Streamline Funding which is a Texas-based private lending company.
- The hard money lending process and the difference between that and conventional financing
- Why having the right partner is important if you want to get into investing or building new construction with hard money lending
- What you can do as an investor or builder in the 2022 housing market to be set up for success
- Why it’s better sometimes to get in and out of a deal vs staying in it to try to maximize profit
- Where you should go for market advice if you’re an up and coming builder or developer
- What Romney looks for when it comes to collateral to deal and what his typical term length is for most deals
- How Streamline Funding is appraising deals
- How you should think about investing in the housing market in 2022
- What you should do to correctly vet a lender
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- Connect with Romney Navarro on LinkedIn
4:20 – The hard money lending process and the difference between that and conventional financing
If you want to work with a hard money lender, you need to be prepared to be vetted. Hard money lenders will evaluate you on 5 Cs—character, capacity, capital, collateral and conditions. Using a hard money lender is sometimes a better option than conventional financing when you’re doing an investment property because of the requirements needed to get approved.
“Collateral is the very first thing that we place weight on. It’s either a good deal or a bad deal just on its face, real estate only. Second thing that we’re looking at is credentials.
Have they done this? Do they have a proven track record? And then cash. Do they have enough money to float this thing? So we’re looking at those things. You know, notice, I didn’t even talk about credit. Didn’t even talk about character. I don’t care what a credit score is.
I don’t care what the background is. Those are so minimal. They don’t move the needle that much. Collateral moves the needle a lot, experience or credentials moves the needle a lot, and cash.”
10:33 – Why having the right partner is important if you want to get into investing or building new construction with hard money lending
Romney says that if you’re a first time investor or new builder, you need to find a partner. Credentials are hard to gauge when a hard money lender is working with a first time investor or builder. That’s why having a partner who has done it before can help establish the initial trust needed.
“Winners are a lot of different things. Winners are people with strong backgrounds, strong cash, strong credentials. We can make an exception and say, look, this person’s got all of the tools, but maybe they’ve not done this.
However, the degree of difficulty on a fix and flip is lower than difficulty on a new construction. That means there’s a lot more that could go wrong in this project. So when we get somebody, a new builder, that’s a very difficult deal to structure. The only way to structure it in this changing market is with a partner.”
14:22 – What you can do as an investor or builder in the 2022 housing market to be set up for success
The housing market in 2022 is more volatile. It’s not as easy to buy and sell a house for a profit. Because of the market, you need to have multiple exit strategies set up. You might need to rent your property to wait to get the price you want. You might need to use something like VRBO in the interim. Make sure you know all of your exit strategies.
“What I’m hearing from my clients is it’s important to have multiple exit strategies. So if I can’t sell, maybe I’ll rent and wait till I can get the price that I want.
Even with high inflationary numbers, the interest rates are still lower than inflation, so it’s a good investment in the grand scheme of things. So multiple exit strategies, rent or something else like VRBO. I would say if you’re in a tight market, that might be a good option, but if you’re out in the burbs, maybe that’s something to reconsider.”
19:56 – Who you need to listen to for staying ahead of the current market
There’s a lot of people giving out advice in today’s real estate market. If you’re a new investor, you need to be following the advice of experts. The people who have done this before. Just because a friend is telling you something they did doesn’t mean it will work for you. Sometimes it’s better to just take a deal and walk away.
“The most sage advice you could get here is ‘don’t necessarily listen to your buddies.’ You might know somebody that just acts on intuition and is wonderful at it.
Your buddy might be telling you the last deal that he did six months ago. I could throw anything on the market and sell it six months ago. Can’t do that today. Your buddy might be just encouraging you because he’s like it’s time to just take a shot.
A new investor really should be listening to the expert’s interpretation of the data to form their opinion.”
23:25 – Where you should go for market advice if you’re an up and coming builder or developer
Expert advice is so important during this market. Romney says if you’re an up and coming builder or developer, you need to have experienced people on your team. Streamline Funding has an experienced team they use to help make decisions and its important for any real estate investor.
“Getting advice from those that have been around the block is gonna help. At a lender level, we could tell you, if we think it’s profitable or not.
At a real estate level, we could tell you, these are what the deals are looking like right now. At the mortgage level, we could tell you, this is what the price looks like to refinance.
There’s so many things—what your debt service is, how much you’re going to pay the bank, how much you’re gonna earn. All of those expert tips and just kind of having those advisors in your pocket are important.”
31:07 – What Romney looks for when it comes to collateral to deal and what his typical term length is for most deals
Romney says that looking at collateral is either you have it or you don’t. There’s no gray area for this. As the market changes, Romney and his team are changing what they are looking at when it comes to collateral to deal and length for deals.
“Going back to data, currently my portfolio consists of 67% loan to after repair value. That means I have some at 75%. That means I have some at 60%. 67% is my average.
Then there’s the other ratio and that is the loan to cost. So if a property costs you $100,000 to buy and $100,000 to renovate, that’s 200 grand and I were to lend $200,000 that would mean a 100% loan to cost.
I’m currently operating at about 90% loan to cost ratio. The new market is trending that down. Just a notch about two and a half points on the loan to after repair value and about two and a half points to loan to cost.”
34:08 – How Streamline Funding is appraising deals
Streamline Funding looks at what their clients say and they come up with their own appraisal value. In this market, it can be easy to fall into a trap where properties are overvalued. Even big institutions are being careful with appraisals so they don’t carry too much risk.
“We don’t know appreciation. We’re underwriting to today’s value. I’ve heard of larger institutions saying that they’re underwriting at a 10% discount. So if it’s worth 200 today, they’re gonna see how it goes at 180. And I’m thinking that says a lot of things. It says that big money’s scared, right? It might even just say this particular money is incredibly conservative, you know, it’s something to think about here. Speak to somebody that’s gonna tell you ‘How much do you think the property’s worth?’ $200,000. And then over here they’re like it’s actually 180.”
40:05 – How you should think about investing in the housing market in 2022
You need to treat investing like a business. In the 2022 market, it’s easy to get lured into a deal that might not work out. There are investors out there who overpaid for property and are now having a tough time getting their investment back.
“Opportunities are starting to surface now. The carnage in our market is in the process of occurring for those investors that maybe bought for too much.
Homeowners are gonna be safe because the interest rates are so low.
But those investors that bought for too much might have to go to option B. And option B might be rent. Option C might be a partner.”
41:47 – What you should do to correctly vet a lender
Because of COVID, there have been a lot of people disguised as lenders. If you’re not following the right steps to vetting a lender, you may end up in a bad situation. Make sure you’re asking for things like a balance sheet, past clients, etc.
“Be weary of brokers. I would say, look for lenders that have a balance sheet. Balance sheet lenders are very important in this market. Those are the ones that are gonna stick around. We stuck around in 2008 because we had a little balance sheet. Now we have a big balance sheet. um, balance sheet lenders, get to make their own rules and get to service your loan.
You should also ask for clients and they should give you their best clients. I’ll give you my best clients.
If you’re looking to build 40 houses, ask for somebody that’s built 40 houses.
If you’re looking to flip your first home, ask for somebody that flipped their first home, something like that.”
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