In the past year, as interest rates have remained low and demand for housing has grown, we’ve seen many new hard money lenders enter the residential real estate investment space on a national scale. We’ve also watched several lenders expanding into new markets and scaling up to compete nationally in multiple states.
That means there’s no shortage of competitive interest rates for investors looking to finance their next residential property or BRRRR (Buy, Rehab, Rent, Refinance, Repeat)project.
While the competition among hard money lenders is a good thing for real estate investors, you could be in for a rude awakening if you don’t understand how your lender plans to do business with you. It’s up to you as a borrower and investor to look past the “teaser interest rate” and dig a little deeper to find out if a loan is really the bargain it seems to be. Often, reputable local lenders who are committed to the areas they lend in offer significant advantages over companies that lend in multiple markets today and are gone tomorrow.
Use these 5 tips to find the right lender for your next real estate investment.
- The lowest interest rate isn’t always the best deal.
While low interest rates are appealing, they may not tell you the whole picture. Ask your lender questions about what fees you can expect before, at and after closing. If a hard money lender won’t disclose that information in writing, keep looking.
- Ask how long it takes to process a draw.
Find out the average length of time it takes the lender to process a draw. Many of the biggest lenders take two to three weeks to reimburse borrowers for work done on a property, which can wipe out any anticipated savings from a lower interest rate.
Most importantly, in today’s market one of a real estate investor’s biggest assets are good contractors. If you’re waiting two weeks or more for your draw to come in and you can’t pay your subcontractors, they are going to go to another job site, leaving you with delayed progress, potentially keeping your property off the market longer before it’s ready to sell and possibly creating the need for an extension on your loan (and the extra expenses that go along with that). Simply said, slow draws can put your project in the RED as you wait for your money, lose good help, and then seekout and hope the replacement help is as competent as they claim to be.
A good local lender with a focus on customer service will usually offer an advantage on draw processing times, reimbursing borrowers promptly. At Corridor Funding, our average reimbursement time from a draw request is two business days.
- Watch out for up-front fees.
If your lender requests money up front, such as a due diligence or application fee, find out exactly what it’s for. If the lender doesn’t clearly explain what the advance payments are for, that’s a red flag. At Corridor Funding, the only thing you pay for before closing is the cost of an appraisal for the property you’re buying and that is paid directly to the appraiser. It’s no secret that there are some bad actors in the hard money lending industry, which is why transparency in your costs is a sign of a good lender. We’ve spoken with many people over the years that had paid an application fee to get a loan process started and never heard from their lender again.
- Look for a commitment to customer service.
Local lenders are focused on generating repeat business by serving as a trusted resource for borrowers. If a lender focuses on building long-term relationships with its investors, that’s a sign that they are the kind of company you want to do business with. At Corridor Funding, 82% of our loans are made to repeat customers, and 41% of new clients are from referrals. We earn the trust of our clients with transparency, fairness, promptness and professionalism.
Also consider how easy it will be to work with your lender. With a larger firm that operates in markets across the country, it’s likely that when you need support, you’ll call an 800-number and talk to a different person every time. When you work with a lender that specializes in your market, your dedicated loan specialist is a quick phone call away (and not three time zones away on the opposite coast, returning your call during dinner).
- Go with a lender that knows the market you’re investing in.
Some lenders will loan money in any market, even when they’re not necessarily familiar with the neighborhood or even the city. While this can provide flexibility to you as an investor, it can also get you into trouble if you are borrowing more to renovate a home than the market will support. A good lender wants you to be successful. When you invest with a reputable local company, you get the advantage of their expertise. At Corridor Funding, our in-depth knowledge of the Texas real estate market helps us guide investors into deals that make sense. Our expertise will help you invest successfully without overinvesting or underinvesting in the property. That’s why our loans have some of the lowest foreclosure rates in the industry, currently at less than half of one percent.
Whatever lender you choose, make sure you understand what you’re really getting. In many cases, a reputable local lender can offer you better service and help you finish your rehab faster – and be there ready to work with you again on your next project.
When you’re ready to invest in Texas, contact the Texas lending experts at Corridor Funding.
KEY TAKEAWAYS FOR REAL ESTATE INVESTORS
- Look beyond the interest rate. Find out what the real costs of your loan will be.
- Ask how long it takes to process a draw. A low interest rate doesn’t help you if draws are slow.
- Watch out for up-front fees. If your lender charges these, understand what you’re getting for them.
- Look for a commitment to customer service. Good lenders want to build relationships and work with you for the long-term.
- Go with a local expert. Local lenders are experts in your specific markets and can help set you up for success with your investment.