Hard Money Facts

Flipping a house requires money – lots of money. Beyond the purchase price, single-family investors must come out of pocket for legal fees, appraisal fees, title costs, closing costs, home inspections, rehab costs and disposition costs. In a Seller’s market, these costs have a tendency to go the way of home appreciation…up, up, up and away. Given the median purchase price for existing homes in June 2020 of $295,300, these numbers add up fast especially when you are doing more than one flip investment at a time.

Whether you are flipping one, two, or dozens of houses per year: maintaining adequate cash reserves is critical to keeping your operation up-and-running, so that you can realize the back end profits associated with your investment. As they say…cash is king!

That is why so many single-family investors look for a financing partner to fund their fix-and-flip investment properties. Having more cash on hand gives you, the investor, flexibility in a dynamic market whether that means more cash to realize an unexpected opportunity, more cash to negotiate a better deal with a faster close or more cash to give you peace of mind through the investment cycle. Knowing which available financing options will give you the most flexibility as an investor is the key.

The pandemic has changed our lives and the economy in major ways. For many Americans, it has meant making the switch from working at the office to working from home. And it looks like working from home will continue permanently for many workers, even though some offices have reopened. With the flexibility of working from home, many Americans have opted to change where they call home. You may even be reading this from the comfort of your own home or local coffee shop!

With this new flexibility, some Americans have opted for a new view from their home office window. They are heading for both rural and suburban areas. We’ve witnessed younger households swap city life for the suburbs, while elderly Americans have hurried the decision to relocate to their retirement destination. Others still, have found refuge in country living. So, what’s left to buy, rent, fix, or flip?

To help you on your journey from rehab to rental, download the free Investment Rental Property Neighborhood Checklist.

How Can Single-Family Rental Property Investors Thrive in the Current Market?

All this has meant a hefty surge in demand for suburban single-family homes, retirement locales, vacation homes and investment properties. And while prices of homes in those markets have skyrocketed, both seasoned and first-time rental property and/or fix-and-flip home investors would be wise not to overlook other options with big potential. The flip side of this current real estate market is that with home prices spiking, little inventory, and high construction costs, an urban buy-to-rent property might be your next best investment opportunity.

Even as the talk is still churning about the swelling suburbs, it’s time to take a second look at urban areas. Urban areas have shown a growing increase in both revitalization and investment. Recent real estate market reports  also indicate that this urban renewal and resurgence began in the spring and should swell well into summer.

What conditions have created this opportunity for the buy-to-rent investment? There are two factors at play: First, an increasing number of young and would-be first-time home buyers are being priced out of the suburban markets where they find themselves looking for a home. Second, many of the most urban areas have been negatively impacted by this suburban “flight to quality." These two factors could create some urban buying opportunities for the single-family rental investor as the undertow brings the urban dweller back to the city in search of a rental home.

The opportunity for buy-to-rent is here. And whether you are new or a seasoned investor, you won’t want to go into new territory without the right partner. That’s where Residential Capital Partners comes in. We can help you decide if a buy-to-rent investment is right for you.

Your inbox: it’s overflowing. Your desk: it’s piled high. Your mind: it’s scattered, to say the least.

A seller’s market can be a godsend when you’ve just rehabbed a promising fix-and-flip property. But when a seller’s market brings you a high volume of offers, things can get complicated fast. Overwhelmed by your good luck, you may be tempted to simply select the highest offer from the stack.

Don’t. Competition breeds excellence. Use the forces at play in the market to your advantage. Borrowers may lie to you. Markets never will.

Follow these negotiation best practices:

1. Highest and Best Offer

If you are staring at a stack of offers on your rehabbed property, then you have done something right. Now, take your game to the next level. Study the offers that have come in comparing price, closing timeframe, conditions to close, etc., and use the best terms of each offer to outline what would be your perfect offer from the perfect buyer. Pick the 3 to 5 of the strongest buyers that:

• Have the best price and terms.
• Have the most experience.
• Have the strongest proof of funds letter or balance sheet presentation.

Call these buyers and tell them they have been hand selected out of many to sharpen their initial offer into a Highest and Best Offer. Tell them they have until 5:00 PM to get their final offer to you. Tell them you will call them by 6:00 PM to inform them if they won or lost. If they ask, have your “perfect offer” list by your side to give them a hint of where they need to improve. And then, go enjoy your day until the clock strikes 5:00 PM.

The purpose of flipping houses — or any property — is to realize a profit. Period. From the minute you secure a property with a hard money loan, your focus is turning your property into a tidy profit that you can take to the bank.

Novice flippers normally have their eyes on this prize. They have worked hard to find the right property. They’ve successfully rehabbed and sold a property or two. They’ve developed relationships in the business from sound contractors to hard money lenders, both of whom can move swiftly at their direction to help them realize their goal – profits and more of them.

But once a novice flipper begins moving up the scale of their craft, their eyes naturally drift to more sophisticated ways to realize and protect their profits as they wield their trade. One of these handy tools of sophistication is the 1031 Exchange.

What Is a Section 1031 Exchange?

Section 1031 is an IRS code that allows you to defer paying capital gains on an investment property if you do a “like-kind” exchange of one property for another.

For example, let’s say you buy a property for $100,000, improve it, and the value rises to $200,000. If you simply sell, you’ll be taxed on your gain at your ordinary income level. But if you trade the property for another property of like value, you can defer your taxes until you sell the exchanged property.

The Rehab to Rental Strategy

The novice turned proficient or expert rehab professional can take the opportunity to turn the 1031 Exchange example above into a powerful wealth building strategy. Upon selling the improved property for $200,000, the rehab professional will immediately begin looking for a property of like-kind or similar value to trade into in order to avoid paying ordinary income tax rates on the gain from sale.

When you take out a hard money loan, bridge loan or investment property loan to buy a flip, you do it with one goal in mind: to make a profit.

In the process of your rehab, many factors will conspire to eat into your profits. Weather. Time. Unreliable vendors. The list goes on. But, few things eat away as much of your profits as taxes; the more you make, the more you pay.

One of the most effective ways to protect  your profit margin is to find legal ways to minimize your taxes. We’ve identified five proven ways to minimize your tax exposure – so you can keep more of the money that you’ve worked so hard for.

1. Maximize Your Deductions

You’re not alone. Nearly one year ago, lenders across the United States froze their fix-and-flip lending programs in response to the COVID-19 pandemic. Today, the market is strong and a resurgence of programs abounds—with one pesky problem: they’re nearly all the same.

Susan Andress is the Business Development Director for Residential Capital Partners’ Correspondent Lending Program. In this role, she’s heard the stories of many lenders facing this conundrum first-hand and helped them make their programs more competitive by using Residential Capital Partners’ platform.

Download the Fix & Flip Correspondent Lending Program Highlights to learn more about our 100% fix-and-flip lending program.

Blazing fast approvals.

The market is hot. Turn-around time is critical. Andress says, “The greatest value I can offer my correspondent is responsiveness and speed in underwriting and closing. We’ve made it a very tight process. Lenders will ask me: ‘How quickly can you close?’ and, I say: ‘As soon as you provide us with a complete file!’”

Residential Capital Partners’ program has an edge thanks to their relationships across the nation. Andress reports, “We have an exhaustive list of appraisers in every market which helps the turn-time on every deal. We also have two dedicated people monitoring the underwriting and approval process.”

Residential Capital Partners has also streamlined the process by providing proof of funds letters to approved borrowers. These letters help borrowers secure a contract from weary sellers trying to pick the right buyer.

Correctly calculating ARV (After Repair Value) is no cakewalk. The market changes daily – by city, neighborhood, and street. To be a great ARV calculator, you must be equal parts historian, detective, and fortune teller. Perhaps Zen master, too, because the stakes are high: calculating ARV incorrectly can literally cost you hundreds of thousands of dollars.

ARV, by its nature, is a moving target, and most fix-and-flippers never hit a bullseye. Yet, Michael Blatney, Residential Capital Partners’ dedicated Portfolio Underwriting Manager, is one of the industry’s sharpest shooters. Why? Because he’s been flipping houses since before there was a name for it – and more or less discovered the concept of an ARV.

Make your next property walkthrough a breeze.

So, if you want to turn a profit flipping houses in 2021, when the market is tight and inventory is low, keep reading and heed his advice.

If you’re not already invested in suburban rental properties, now is the time to start.

The demand for suburban single-family rental homes has continued to surge since the COVID-19 pandemic began. City-dwellers are fleeing their multi-family units for more social-distancing-friendly, single-story homes. For example: after the pandemic hit New York City, an estimated 5% of the population up and left town and new leases in Manhattan dropped by 60% in May. To top it off, many families that would usually buy a home are opting to rent a home. A study from OJO Labs reported that 80% of homebuyers have postponed or stopped their housing search – giving rental investors the opportunity to gain new tenants.

This has opened up the opportunity for landlords to raise their rent. Real estate data analytics company CoreLogic found that rent for single-family rental homes rose by 1.7% in May alone, and rent for the cheapest single-family rental home rose by 2.8% across the board.

If you’re looking to take advantage of this opportunity and diversify your portfolio with single-family rental investment properties, here’s everything you should know to get more bang for your buck.

Panic is the enemy to your investment strategy. Choosing the right hard money lender might just be the antidote.

As any neuroscientist can tell you, humans make poor decisions when they panic – and property investors are no exception. Panic literally disengages our pre-frontal cortex – the area of our brains that brings logic and flexibility into decision-making. Under duress, our brains instead rely on the amygdala – the part of your brain that responds to instinct, emotion, and the impulse otherwise known as “fight or flight”. You know, the stuff any seasoned real estate investor will tell you to avoid when making an investment.

Any hard money lender worth their salt will tell you to avoid these very same impulses when a crisis hits while offering sage advice such as “your safest bet is to stay the course” or “maintain objectivity”. So why is it so many lenders haven’t taken their own advice, and either stopped giving out new loans or inflated their interest rates in response to Coronavirus?

Perhaps it’s not so easy for lenders to walk the talk without prior experience lending during a turbulent economy.

Investing in real estate during “unprecedented times” is not for the faint of heart. Nevertheless, savvy, seasoned house flippers recognize that this change in the market presents a great opportunity to outbid and outperform the competition — if you keep moving and adhere to your budget.

Consider this your cheat sheet for saving a bit here and there while renovating during Coronavirus. Little differences in your business practices can make a big impact on your bottom line this year.

1. Don’t Stop Flipping or Renovating

The market goes up and the market goes down. It’s easy to remember when times are good, and harder to remember in the face of uncertainty, especially when your TV and social media channels skew to the negative.

But now is actually a great time to invest, provided you have an ample safety net. If you don’t already know, Residential Capital Partners formed during the 2008 housing crisis — when other lenders were closing their doors. There is no room for panic in house flipping. Invest when others doubt.

People are still buying houses. By this May, demand for housing surpassed pre-COVID-19 levels. Which means you should keep flipping with as much cash as you can muster so you can keep turning a profit. Never let a good crisis go to waste!

2. Choose the Right Property

Buy Properties in Great Locations

Coronavirus may have thrown real estate for a loop, but the golden rule still applies: location, location, location. As always, aim for homes of lesser value in neighborhoods that are seeing an increase in value.

Buy Properties That Need Minimal, High-Return Upgrades

What will get you a better return is updating your kitchens and bathrooms. According to US News, low-end kitchen remodeling in the United States starts at just $4,000. The starting cost of a low-end bathroom makeover is $6,000. That’s pennies compared to large overhaul projects, like wood flooring, a second story or other additions to square footage.

Salvage what you can to keep the character of the home – and save yourself some cash. Opt to paint out-of-date cabinetry, instead of installing new cabinets. See if you can keep existing tile, and replace the toilet, sink, and hardware.  Our rule of thumb: low to moderate repairs wins every time!

As a relationship-oriented private lender, Residential Capital Partners takes pride in who we hire. Our criteria are simple, yet stringent: personal experience in real estate investing and a proven track record of treating investors like partners — as opposed to a transaction. Which is why we’re especially excited to welcome Rodney Young, a former HomeVestors loan development manager — and very familiar face — to our team.

I built remarkable relationships at HomeVestors. Now, I’m humbled to work with the same investors at Residential Capital Partners.” — Rodney Young

What Rodney Young Brings to Residential Capital Partners

Rodney started his career at HomeVestors in 2015 as a regional business development manager. His career at HomeVestors began during an explosive period of growth for the company. During his tenure at HomeVestors, the network of franchisees grew from 500 to over 1,100 franchisees. As a business development manager, Rodney established ongoing relationships with many HomeVestor franchisees. After a couple of years, Rodney began serving as a loan development manager for HomeVestors, as the company worked to secure financing sources for its franchisees. During this period, Rodney trained franchisees on the many facets of private lending and connected them with trustworthy private lenders. Residential Capital Partners was one of his preferred lenders.

Rodney says, “Residential Capital Partners understands the HomeVestor franchisee. They understand the system. They created their lending guidelines based on the HomeVestors model. And it works! When I was loan development manager, I had the opportunity to work with the nation’s leading private lenders, and Residential Capital Partners was always at the top of my list.”

The coronavirus outbreak— and the subsequent turbulence of the stock market—has revealed stark differences between private lenders’ customer service models:

1. There are hard money lenders that rely on Wall Street to buy loans they have placed on a warehouse line. They treat loans as transactions.
2. And, there are lenders that have used their own balance sheet to fund loans. They treat loans as relationships.

Did your lender back out of your loan? Are you struggling to get them on the phone? Or get a straight answer to questions when you do? This is a sign your lender uses a transactional business model. This is also a sign that now is the time to find a hard money lender with a relationship business model.

“A lot of our competitors have said they’re relationship partners, and coronavirus was the end of that relationship.”

COVID-19 Reveals the Downfall of the Transactional Business Model

Private lenders with a transactional business model will tout both their customer service and the expedience of their capital, which they may deliver when Wall Street will buy up their loans. But what happens to customer service when the expedient capital goes the way of Wall Street’s fear? It evaporates and the very nature of a “relationship” evaporates with it.

In the words of Paul Jackson, Principal of Residential Capital Partners, “A lot of our competitors have said they’re relationship partners, and coronavirus was the end of that relationship. We want to be the lending partner of choice for our customers in good times and uncertain times.”