You use real estate loans to leverage deals, but which loan is best?
You should have one goal with leverage: maximizing cash flow on your investments.
There are 4 main types of real estate investing leverage:
- Hard money
- Bank financing
- Hedge funds
But where do they each fit? How can you tell which type of leverage is right for your deal?
It depends on what your particular deal needs most to succeed – speed, low pricing, flexibility, or a little bit of everything.
Speed with Hard Money
What if you have a great deal, but you’re required to close in 5-7 days? In that case, you need hard money.
You’ll meet sellers in your real estate career who just don’t want an extended closing. These sellers would rather you close quickly – and they’ll give you a better deal on the price if you can do it. Sometimes, taking too long to secure your financing can get you kicked out of a deal.
You can call your hard money lender and get leverage fast. There’s no hold-up for an appraisal or trudging through a lengthy underwriting process. Hard money is specifically designed for real estate investing.
Real Estate Loans to Leverage Deals for Every Investor
Even seasoned real estate investors, who do dozens of deals every year, still require hard money from time to time. Every investor runs into deals where they need to close quickly. Whether it’s because your bank won’t be ready in time, you’ve maxed out your line with your hedge fund, or some other unexpected circumstance, you need a hard money lender in your portfolio for speed.
Fast closing can capture a lot of equity on a property. Despite hard money being one of the most expensive forms of leverage, purchase price savings on a quick close can far outweigh the cost of the loan.
Pricing with Banks
If hard money is for speed, then banks are for price.
Finding a bank that loves working with real estate investors is a valuable weapon. If you can build a relationship with the right bank, you can get a better rate and a better closing cost.
Some circumstances when you’d benefit from getting your leverage from a bank include:
- Whenever you have the time to close. If you can afford to wait for appraisals and underwriting, your loan costs will be much cheaper.
- If the rehab work will take longer than 6-9 months. When you close on a flip with hard money, you need to complete construction on the property within a month or two. If you use a bank loan, you can afford to spend longer fixing up the house.
- Any time you want more cash in your pocket! Banks have half the interest rates of hard money lenders. Lower rates and fees mean more money in your pocket by the time your property sells.
Flexibility with Hedge Funds
You might find yourself in need of a lender who is more flexible than banks, but still has an “unlimited” cash supply. In that case, hedge funds will have the right leverage for you.
Hedge funds are also known as capital funds or private equity. These are firms that can fund real estate investments across multiple states, have a lot of money available for both flip loans and DSCRs.
A problem with banks is they’re limited to one state or region. A problem with hard money and OPM is that funds can run dry. Hedge funds solve those problems.
Keep hedge funds in your portfolio to have a lender who can handle every deal. They can grow with you as you move across state lines and take your investment career to the next level.
Gap Funding with Real OPM
OPM stands for other people’s money. It comes from a real person you know (who’s sitting on a lot of cash!). They want to put their money somewhere secure that’ll give them a better rate than a bank… So they loan it to you.
You can give your OPM lender a rate of 5-6% back. For you, this beats the 9-12% rates of hedge funds or hard money. For your lender, this beats the 1-2% rate they’d get from a CD or savings account.
OPM can be used to fill in the gaps of any project. It could cover down payment or construction costs, or potentially fund entire properties.
With reliable OPM, you have access to the speed of hard money, the low cost of a bank loan, and the flexibility of a hedge fund.
The main drawback of OPM is simple: it can run out.
The Right Real Estate Loans to Leverage Deals AND the Right Lender
No one form of leverage is going to be right for every single deal. Understand this: You need a mix of all four types of loans to be truly successful as a real estate investor.
And not only do you need the right loan, but you also need the right lender. Getting to know the lenders in your area is vital.
Find Lenders Whose Real Estate Loans Leverage Deals
Not all banks are willing to work with real estate investors. Banks tend to have a “specialty,” whether car loans, credit cards, or even HELOCs. Many banks don’t want to do deals with real estate investors.
It can be the same with hard money and hedge funds – they’re all looking for a particular client. One of your deals may not fit the criteria for those lenders, but another one will.
There is no one-size-fits-all. Reach out and find the lenders that fit your needs.
Find lenders who focus on real estate investing loans regularly – not lenders who will help investors every once in a while. They’re the lenders who will want your business, and will do everything they can to keep you. For a lender who specializes in real estate investing, a successful investment for you is successful for them, too.
If you have any questions about:
- The different forms of leverage
- How to find a good lender
- Which loan is right for your deal
Send us an email at Info@TheCashFlowCompany.com! Or visit our YouTube channel for more info on cash flow in real estate.