Real estate is a wise and
popular investment option for several reasons including great returns, tax
benefits, and increased value over time. When hopeful investors think about
obtaining financing for real estate, the set conditions from traditional
lenders stop many of them in their tracks. These include high credit scores,
low debt-to-income (DTI) ratio, and a down payment of up to 30%.
Banks put these stringent
requirements in place after the economic downturn in 2008 and sadly, not
everyone can meet them. Even with all the necessary requirements, it can be a
lengthy and agonizing process. Fortunately, non-conventional methods of
financing have enabled eager investors to realize their dreams of becoming
property owners, and in a short time.
These financing alternatives are hard money and private money. Although they both have advantages over traditional lending, they also have downsides. Borrowers must thoroughly research each alternative and each lender to ensure all is a good fit and to avoid disastrous situations.
is Hard Money?
Hard money is a short term,
asset-based type of loan. A hard money loan is suitable for purchasing land,
construction, fixer-uppers, and flips. You can get it from a group of
investors or a company. Unlike usual lenders, hard money lenders are more
interested in the value of the property than your credit report.
The words ‘hard money’ does not
imply that this financing is difficult to acquire. On the contrary, it’s quite
easy. It actually defines the property being a hard asset. When borrowers have
been frustrated by the banks, or they require quick financing, this is a great
alternative. The typical payment period is 1 year although it can be increased
up to 2-5 years.
Other requirements by lenders may include:
The geographical location (some
lenders provide their services locally or to particular states)
Some may even ask you how many
homes you flipped; the higher the number of homes you flipped that have had
good repayment records lowers your interest rate
Borrower’s plan for the
property. The lender may want to know the borrower’s intentions, for example,
whether they plan to renovate the property or obtain further financing over the
Properties Financed by Hard Money Loans
Any kind of property can be financed by a hard money loan, including commercial property, land, residential property and industrial property. A few lenders may specify a niche, for example, commercial and not residential. Very few lenders will transact with owner-occupied properties. They involve extra requirements and include loads of paperwork.
What is Private Money?
Private money is short-term
financing borrowed from an individual who could be a friend or family member
and can be used for financing real estate transactions. The characteristics and
benefits are basically similar to those of hard money.
Benefits of Hard Money and
Quick Approval Process
The process of obtaining the loan from www.justrightloans.com is quick and straightforward. It can take a maximum of two weeks as opposed to a bank’s usual 30-40 days. No time is wasted on filling and signing piles of paperwork or checking your credit history. Lenders make decisions fast. They focus more on the property.
As long as the collateral has
good value, they are not worried about whether you will make the payments or
not. They will simply sell off the property and probably make more money than
what you would have paid back.
Unlike traditional lenders who have their rules set in stone, hard money lenders assess borrowers on a case-by-case basis. This means that you can come to terms about extending your repayment period based on your state of affairs.
Downsides to Hard Money
Interest rates differ for each lender and each geographical
location. Areas with several money lending firms will charge lower because of
competition. Loans from hard money lenders are high risk, and so they will
charge high-interest, usually between 10% and 15%.
High origination free
Hard money lenders will charge a high fee for processing your loan application because the loan is risky. They can charge as much as 5% of the loan compared to banks, which might charge only 1%.
Short Repayment Period
mortgages typically have long repayment periods of 30-40 years, these loans
have a very short period of up to a maximum of 5 years. Real estate properties
are not cheap and normally require a longer period to pay back unless the
property is highly profitable.
taking on a private or hard loan, borrowers should ascertain how long it would
take for the property to become profitable. Then they can see whether the
repayment period is feasible.
Hard money lenders use a loan-to-value (LTV) ratio to decide on
the amount of the loan. Most of these lenders provide between 65 and 75% of the
total value of the property. They maintain a low LTV ratio so that it’s easy
for them to put the property on the market with the likelihood of getting back
Some lenders will use the after-repair value (ARV) to determine the total amount of the loan. This is the future value of a property after it has been renovated by the borrower. A few lenders may even offer to cover the rehabilitation costs of the property on top of a high percentage of the ARV. This would seem attractive to the borrower; however, it makes the deal riskier because of even higher interest rates of up to 18%. If the property is highly profitable, it would be better for the borrower to cover the rehab costs.
Lenders You Should Avoid
Some hard money lenders have ruined the industry’s name with predatory lending actions. They intentionally provide high-risk loans so that the borrower is in a position of not being able to pay. They exploit the borrower’s inability to understand certain financial terms regarding loans.
Sometimes lenders will bait borrowers with
attractive schemes and then, later on, switch the scheme without the borrower
They only discover these several months later when their subsequent payments are much higher. After a thorough investigation, they realize that there was a modification on the interest rate that they were not informed about. Eventually, the lenders end up owning borrower’s property when borrowers fail to pay, as was their intention all along.
Be careful not
to fall prey to predatory lenders. The loan may be quick and easy to get, but
you need to do thorough research, preferably with referrals if possible. Check
your documents completely to make sure that they are consistent with what was
agreed. Getting educated with financial terms can save you from a
Department of Housing and Urban Development has put on controls to eliminate
this unscrupulous behavior. Many money lenders have adjusted their operations
by further assessing the eligibility of borrowers through income documents.
the Right Hard Money Lender
You can find
the right money lender by starting with a Google search. Type in ‘your area’ +
‘hard money lenders.’ This will bring up a list of lenders that you can
you have real estate clubs in your neighborhood, you could attend the meetings
and find out from other investors.
The lender should ideally have
a great track record and should cater to customers’ needs first. You can check
out their website for reviews and meet with them to decide if they are the
right fit for you. Stay away from lenders who have no reputation to speak of.
If you’re new to private
lending, the lender should have several years of experience as well. You need
to deal with a transparent, qualified professional who will provide sufficient
knowledge about these loans, including the good and bad. This will help you
weigh your options.
Although alternative lenders typically charge a high-interest rate, they aren’t all the same. You can still do some digging around to compare and find the one with the best rate for you.
Every lending opportunity has a
good and bad side. The point is that you choose the one that works for your
situation. If you are an investor looking for lending alternatives, hopefully,
the above information has given you some confidence. You can now approach hard
money and private money knowing what to expect.
The Fed has decided to raise its benchmark interest rate by 0.25%, from 0.5% to 0.75%, citing a stronger economic growth and rising employment.
This is only the second interest rate increase in a decade.
The central bank said it expected the economy to need only “gradual” increases in the short term.
Fed chief Janet Yellen said the economic outlook was “highly uncertain” and the rise was only a “modest shift”.
However, the new administration could mean rates having to rise at a faster pace next year, Janet Yellen signaled at a news conference after the announcement.
President-elect Donald Trump has promised policies to boost growth through tax cuts, spending and deregulation.
Janet Yellen said it was wrong to speculate on Donald Trump’s economic strategy without more details.
She added that some members of the Federal Open Markets Committee (FOMC), the body which sets rates, have factored in to their forecasts an increase in spending.
As a consequence, the FOMC said it now expects three rate rises in 2017 rather than the two that were predicted in September.
Janet Yellen told the news conference: “We are operating under a cloud of uncertainty… All the FOMC participants recognize that there is considerable uncertainty about how economic policy may change and what effect they may have on the economy.”
Also, the Fed chairwoman declined to be drawn on Donald Trump’s public comments about the central bank, and his use of tweets to announce policy and criticize companies.
“I’m a strong believer in the independence of the Fed,” Janet Yellen told journalists.
“I am not going to offer the incoming president advice.”
The interest rate move had been widely expected, and followed the last increase in 2015.
Rates have been near zero since the global financial crisis. But the US economy is recovering, underlined by recent data on consumer confidence, jobs, house prices and growth in manufacturing and services.
Janet Yellen said the rate rise “should certainly be understood as a reflection of the confidence we have in the progress that the economy has made and our judgment that that progress will continue”.
Although inflation is still below the Fed’s 2% target, it expects the rise in prices to pick up gradually over the medium term.
The Fed also published its economic forecasts for the next three years.
These suggest that the Federal Funds rate may rise to 1.4% in 2017; 2.1% in 2018; and 2.9% in 2019.
GDP growth will rise to 2.1% in 2017 and stay there, more or less, during those years.
The unemployment rate will fall to 4.5% over the 2017-2019 period, the Fed forecast.
Inflation will rise to 1.9% next year and hover at that level for the next two years.
The dollar rose 0.5% against the euro to €0.9455, and was 0.9% higher against the yen at 116.17 yen.
Following the Fed’s announcement, Wall Street’s main stock markets were largely unmoved, but drifted lower later. The Dows Jones index closed down 0.6%, and the S&P 500 was 0.8% lower.
The Switzerland-based Bank for International Settlements (BIS) has warned that ultra-low interest rates have lulled governments and markets “into a false sense of security”.
The BIS – usually dubbed the “central banks’ central bank” – urged policy makers to begin to normalize rates.
“The risk of normalizing too late and too gradually should not be underestimated,” the BIS said.
Markets have rallied since January.
The BIS has warned that ultra-low interest rates have lulled governments and markets into a false sense of security (photo Flickr)
The FTSE all-world share index is up 5% so far this year, while the VIX, a measure of implied US market volatility known as the “fear index”, is at a seven-year low.
“Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,” the BIS said in its annual report.
The BIS said that low interest rates had helped increase demand for higher risk investments on stock markets as well as in property and corporate bonds markets.
The organization doesn’t set policy but serves as a forum for central bankers to exchange views on relevant topics from the global economy to financial markets.
While global growth has improved, the BIS said it was still below its pre-crisis levels.
“Growth has disappointed even as financial markets have roared: The transmission chain seems to be badly impaired,” the BIS said.
It said policy makers should take advantage of the current upturn in the global economy to reduce the emphasis on monetary stimulus.
And it warned that taking too long to do this could have potentially damaging consequences, by encouraging investors to take too much risk.
“Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent,” it said.
“The predominant risk is that central banks will find themselves behind the curve, exiting too late or too slowly,” the BIS added.
The BIS was founded in 1930 and is the world’s oldest international financial institution. Its 60-strong membership includes the Bank of England, the European Central Bank, the US Federal Reserve, the People’s Bank of China and the Bank of Japan.
The Cypriot banks offered depositors really good rates of interest – as high as 4.75% for long-term accounts – which attracted not only local people, but also hordes of foreigners.
How could the banks afford to pay such great rates? By investing the money from those “savers” in something that itself paid really great rates of interest: Greek government bonds.
When Greece got bailed out, the value of the bonds was cut in half.
But that wasn’t all. The fat interest rate that those bonds were paying was also cut – to just 3.5%.
The Cypriot banks offered depositors really good rates of interest which attracted not only local people, but also hordes of foreigners
That meant Cyprus’ banks had a lot less money coming in the door. But they still had to pay their depositors – and in some cases they’re paying depositors more than they’re getting from the bonds.
In other words, the Cypriot banks are deep in debt, and they’re not making enough money to make their interest payments. They’re on the verge of going bust.
For help, the banks turned first to their European neighbors, who agreed to lend them some cash. They’ve now got more money coming in the door, but it’s not enough. Now they need to attack the problem at the other end, by reducing the amount they owe.
Who do they owe money to? The depositors.
Now, some of those depositors are protected – accounts under 100,000 euros are insured.
Cyprus is taking a big chunk of the money in those accounts – around 40%.
The 40% “tax” on those big accounts does two things. First, it brings money into the door of the banks, giving them more money to operate with. Second, it reduces the amount of interest they have to pay to those account holders each month.
Italian and Spanish 10-year bond yields have been rising ahead of a summit of eurozone finance ministers on Monday.
The yield on Spanish 10-year bonds, which are taken as a strong indicator of the interest rate the government would have to pay to borrow money, rose above 7%, while Italian bond yields rose to 6.1%.
Yields above 7% are considered to be unsustainable in the long term.
Details of the bailout of Spain’s banks are expected from eurozone ministers.
Their meeting will continue on Tuesday.
The high yields on Spanish and Italian bonds were in contrast to the rates at a short-term German bond auction on Monday.
Italian and Spanish 10-year bond yields have been rising ahead of a summit of eurozone finance ministers on Monday
The yield on six-month German bonds fell to a record low of -0.03%, meaning that investors were paying the German government to lend money to them.
It is the second time that German bond yields have been negative. The auction was oversubscribed, despite the negative yield.
Investors have been flocking to German debt as a safe haven from the problems elsewhere in the eurozone.
Eurozone officials have been reported as warning that not too many quick decisions should be expected from the finance ministers’ meeting, which is supposed to add detail to the agreements from the eurozone leaders’ summit on 29 June.
The communiqué from that summit said it expected the finance ministers “to implement these decisions by 9 July”, although many analysts say that now looks optimistic.
Leaders have already agreed to lend Spain’s banks up to 100 billion Euros ($123 billion) and independent audits have said that they will need up to 62 billion Euros.
The finance ministers are likely to confirm the size of the bailout and which conditions will be applied to the loans, both for the banks and the government.
Among the key agreements from the 29 June summit were moves towards banking union with the European Central Bank (ECB) acting as a supervisor and allowing European bailout funds to buy bonds to try to reduce countries’ borrowing costs.
But since the summit, there have been signs that Finland and the Netherlands would oppose the use of bailout funds in this way.
There is expected to be discussion of the new Greek government’s policies. At the end of a three-day debate, the Greek government, as expected, won a vote of confidence on Sunday.
Another area of discussion for the eurozone finance ministers will be choosing a new leader.
Jean-Claude Juncker has been co-ordinating the Eurogroup of finance ministers since 2005. His term of office ends on 17 July, but it may be extended.
Also on Monday, ECB president Mario Draghi will be appearing before the European Parliament’s Committee on Economic and Monetary Affairs to give his views on the state of the currency bloc’s economy.
The European Central Bank (ECB) has announced it reduces its key interest rate from 1% to 0.75%, a record low for the eurozone.
The move comes as the eurozone economy continues to be weak.
The ECB also cut its deposit rate, from 0.25% to zero.
A cut in the ECB’s deposit rate is designed to stimulate lending between banks, as funds placed with commercial banks overnight are currently receiving 0.3% in interest.
Surveys released earlier this week indicated that the eurozone’s service sector had continued to shrink in June and that business confidence had fallen.
The ECB’s president, Mario Draghi said the eurozone was likely to show little or no growth in the second quarter of the year, but should recover somewhat by the end of the year.
The European Central Bank reduces its key interest rate from 1 percent to 0.75 percent, a record low for the eurozone
Mario Draghi, said the eurozone economy faced risks, but that inflation did not appear to be a threat: “Inflation rate pressure…has been dampened. At the same time, economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment.”
At a media conference following the announcement of the decision he was asked it the situation was as bad as in 2008, to which he replied: “Definitiely not. We are not there at all.”
The rate cuts come despite an inflation rate running above the 2% target for the single-currency zone.
But the rate has been sliding recently and is expected to fall to an average of 1.6% next year.
An interest rate below inflation is meant to discourage saving and promote investment, as the interest rate does not keep pace with inflation, meaning the value of the money on deposit is eroded.
The interest rate cut is the third since Mario Draghi became ECB president late last year.
Mario Draghi said the decision on rates was unanimous.