Understanding the power of leverage using hard money loans to maximize returns and accumulate wealth is critical for every budding flipper and real estate developer.
The world of finance is littered with terms and acronyms.
Many of them you probably already understand without realizing it.
Unless you pay cash, anyone who buys an investment property uses leverage.
The word literally means the power or force of a lever – a simple machine which makes a job easier.
Leverage makes owning a property easier because without it, most people could not afford it.
It is merely the act of borrowing money to increase the potential return on an investment.
The end game is to generate returns that exceed the cost (the interest payable) of the borrowing.
The power of leverage for flippers and developers in the lucrative California real estate market is multiplied when they use hard money.
Hard money loans can be approved quickly and help deliver bigger profits while supercharging your journey towards financial freedom.
Here’s how to do it.
Hard money loans
There are several options for developers applying for funding to buy an investment property.
Most involve traditional mortgages or variations of them such as home equity loans or lines of credit.
But smart real estate developers use hard money loans to finance their projects.
Hard money loans are specifically tailored to the unique needs of flippers and developers.
Here’s how they differ from traditional loans:
Easy to secure approval – They are assessed not on the applicant’s credit score or borrowing history but on a property’s ARV (After Repair Value).
Fast money – They can be approved in as little as 48 hours ensuring developers don’t miss out on targeted properties – it’s a time frame traditional lenders simply cannot meet.
Short terms – Usually between 6-24 months, often with the option to close earlier if needed.
Higher interest rates – These reflect the increased risk for the lender, however higher interest payments are negated by the short term of the loan.
Maximizing your returns with hard money
Once you understand the power of leverage and the value of hard money for flippers and developers, you are in a strong position to maximize your returns.
These are the strategies you should be employing to do just that.
Identify high-potential properties
Seek properties with strong potential for appreciation.
They may be in areas of high demand or emerging neighborhoods undergoing gentrification and with government investment via local infrastructure.
Always look for undervalued properties such as the worst house in the best street or deceased estates seeking fast closures.
Minimize your downpayment
Hard money lenders typically require smaller downpayment than traditional lenders – often as little as 10-30%.
This allows you to steer your capital towards the cost of repairs or other investments.
It gives you the potential to purchase larger assets with smaller downpayments.
It also allows you to increase your cash-on-cash (CoC) returns.
CoC is an important metric in real estate investing and expresses your annual pre-tax cash flow as a percentage of your total amount invested (your downpayment, closing costs and interest payments).
The smaller your downpayment, the higher your CoC stands to be.
Maximize returns through renovation
In California where home values are high, even modest renovations can yield substantial returns.
Undertake practical upgrades that increase value such as open plan living, kitchen and bathroom upgrades and opportunities that provide for additional accommodation.
Environmentally conscious additions and energy-saving saving devices are also handsomely rewarded in the California market.
Sell for profit or refinance
With the renovation completed, you need to decide whether you want to sell or rent the property, employing either a fix-and-flip or BRRRR (buy, rehab, rent, refinance, repeat) strategy.
If selling, use the proceeds to discharge the hard money loan and reinvest the profits in your next project.
If renting, refinance to a traditional loan to reduce your interest payments.
Scale your portfolio
Your first flip is only the beginning.
By using hard money loans and the power of leverage, you can acquire and work on multiple properties simultaneously, accelerating the growth of your real estate portfolio.
Positive and negative leverage
The power of leverage gives you the ability to achieve a higher ROI (return on investment).
When that return is higher than your borrowing costs, you have achieved positive leverage which is the desired outcome.
But there are risks to leveraging which can result in negative leverage – when your borrowing costs are higher than your investment returns.
This can occur when:
- Flippers pay too much for a property
- A market downturn reduces demand
- Property values unexpectedly dip
- Interest rates rise sharply
- An unsuccessful exit strategy (you fail to sell or rent the property)
Mitigating leverage risks
Diversifying your portfolio and lowering your LTV (loan-to-value) ratio mitigates your risk of overleveraging.
California’s real estate market is incredibly diverse.
Hence, you can diversify your portfolio by holding different types of properties across different cities and counties.
It reduces your exposure to market changes in one particular region or asset type.
Secondly, a lower LTV comes from having greater equity in a property.
This in turn protects you from changing economic conditions.
Investors who have around 25% equity in their properties face far less risk than those who have only 10% equity.
Finance done right …
There is so much money to be made from flipping and developing houses in California’s rich real estate market.
Once you understand the power of leverage and how to use hard money to finance short-term projects, the sky is the limit.
The most successful flippers and developers have experienced professionals in their corner who don’t just understand the local market but also act as their hard money lender.
In California, that one-stop shop is Equidy.
Equidy has an intimate and personal history with property in California and has covered all aspects of real estate and property development in the state for more than 40 years.
They work closely with their clients to ensure they utilize the power of leverage and maximize their return on investments without putting themselves at unnecessary financial risk.
They also work creatively with them every step of the way, providing their wealth of knowledge and support network as their projects take shape.
Equidy doubles as a hard money lender, meaning you can acquire expert advice while gaining instant funding for your project.
They stand by their core belief that anything is possible and they are determined to prove it every single day.
Even in challenging economic times, they love to reward entrepreneurship and strive to help their clients realize their wealth creation dreams.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimise the risk to all parties.
Contact Equidy today to book your free strategy call.
