Private funding can be life-changing: flip houses with no cash
Yes, you really can invest in real estate with no cash. It’s not as easy, but it is possible. If you’re successful hunting down good deals and you use a hard money lender, the cash requirements can be very low. Hard money can be a game-changing move for an aspiring real estate investor without much cash to contribute. You can leverage your limited cash exponentially with hard money. Even if you qualify for a cheaper conventional loan, there are some interesting quirks to hard money that makes it very advantageous in certain situations. Next up, more on why hard money is a game-changer that could empower you to invest in real estate with no cash, even in an expensive market.
100% LTC: Hard money enables you to invest in real estate with no cash
Loan to cost (LTC) is much more liberal with a hard money lender. Almost no conventional lenders will do 100% LTC. Most will be 90% and many will be much less. A hard money lender that will do 100% LTC is rare, but we exist. The catch? You still need to meet the 70% LTV, loan to value, requirement. A property worth $1MM would be approved for a $700k hard money loan. That’s great news if you’re buying it for less than $700k, or you have the cash to make up the difference. It’s hard to land a deal at 70% or better, but our clients manage to do it all the time, even in central Austin.
LTV vs LTC: How hard money can provide more leverage than conventional loans
Let’s say you’re under contract for a central Austin property for $500k, but it’s worth $1MM. A bank would typically require 20% down, $100k. A hard money lender would lend you the full contract price of $500k, plus another $200k toward renovations. A hard money lender would lend $300k more than a bank because we base the loan amount on the value of the property, not the price of the property. Loan to value vs loan to cost (LTV vs LTC) is an important distinction. If you get a good enough deal, a hard money lender could enable you to invest in real estate with no cash.
Low net worth: NBD
Hard money lenders don’t require a high net worth. We’re asset-based lenders, so the property and associated equity are of the highest importance to us. We only require a PFS, personal financial statement, for larger loans. They’re a contributing factor on the interest rate, but a PFS does not typically disqualify our applicants for a loan. Banks expect much more than hard money lenders in this department.
Tax returns, W2s, employment history, salary information: not required
Hard money lenders don’t typically require a specific income from your job or other sources to qualify for a loan. Independent contractors and business owners often have fluctuating or irregular income from a bank’s perspective. Tax returns don’t always show the whole picture of a borrower’s financial position. Hard money lenders put much less weight on these documents, and in most cases don’t require any of them. Banks have been known to decline a loan at the closing table for a job change or loss, even if the borrower has the means to pay. Even something as seemingly simple as a car purchase during your contract to closing period could lead to a denied mortgage from a bank lender.
Cash reserves are not normally required when you use hard money. We don’t typically check bank statements at all. We want you to succeed, so we want to know how you plan to service the loan we’re offering, but it’s much less formal than a bank’s requirements. Bank requirements will make you feel like you need to have the money to borrow the money. It’s not uncommon for a bank to decline borrowers who have enough cash in the bank to repay the loan immediately, simply because they don’t like the income history, or credit, or whatever other reasons they can figure out.
Important exception: earnest money (EM)
There’s an important exception to invest in real estate with no cash. Unless you get very, very lucky with your sellers, you’re going to need some earnest money. The amount is going to depend on your local real estate market and the price of the property. In Austin Texas we expect around $10k per $1MM, and more is always nice. A $700k house would need $7k earnest money, give or take. The earnest money is money you’ll typically get back if the contract falls through. Actually if you’re careful, your earnest money is never at risk. The option fee is, but that can normally be a few hundred dollars instead of thousands. If you need more info about Texas real estate contracts head to this page.
Have a property to purchase or refi in Texas? We’re a direct lender for Texas real estate investors. Apply today and get a term sheet tomorrow. Unlock your potential with private real estate funding. Invest in real estate with no cash.