Today’s REI Classroom Lesson

Kelly McDonald explains what you should be focusing on when selecting what lender is right for you on a short term project.

REI Classroom Summary

When you’re looking at a short term loan, Kelly goes over why a small difference in interest rates shouldn’t be a deciding factor in who you choose as a lender.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Kelly: Hi. I’m Kelly McDonald. I’m the Vice President of Sales here at RealtyShares and I’m excited today to talk to you about why interest rate does not matter in short term financing.
Mike: This REI Classroom real estate lesson is sponsored by, FlipNerd’s private investor coaching program and your blueprint to investing success.
Kelly: If I had a nickel for every time somebody has ever asked me, “Kelly, what’s your lowest rate?” I would not be sitting in front of you today. Now, the thing is here is that short term financing especially, rate is very relative. Remember, this is not your house that you’re going to live in and you’re going to have this mortgage for 30 years and every cent is going to count towards the interest rate. You’re going to probably have this loan no more than six months, at least that’s what we’re all hoping and we’re planning on for you to exit it within the six to nine-month frame, right?
So you’re only going to keep it for a very short time. A lot of times what I see folks do is they’re calling from lender to lender to lender trying to find the difference between a half a percent or maybe even a full percent or two and it’s costing them more money by making those phone calls than it would have been to just get the deal, move it forward, close it, and make the profit on the back side. Okay?
The thing that you should really be concerned about when you’re looking for a loan is that the speed of funds is what actually matters. The faster that we can put that money into your hands, the faster you can close the loan means the faster you can begin the project, the faster you can exit the project and make the money and move onto the next one. The more projects you can do in a year, well, you know, that means more money in your pocket every year. So remember that speed is what actually matters.
Everyone one says, “We can close your loan in 10 days.” Imagine if instead of spending the first two days talking about what size your interest rate’s going to be, we are already halfway through the appraisal. Right? You get my point.
The next thing you need to worry about in terms of who you should be going with is the draw process. What is a draw process? Once you close, remember, the money’s held back that you need from escrow. How fast and how easy is it to get there? Do you need to jump through 100,000 hoops just to get your $10,000 back? And what is that process? Do they have an asset management team that is going to be there when something gets sticky?
For example, maybe you walk into the house you’ve been working on for three months, you go downstairs in the basement, oh my goodness, a pipe burst, it’s filled with water. You’ve already used your contingency budget. Is the asset management team going to help you restructure your budget that they have held back so you can go ahead and exit the project successfully? That’s what’s important.
How many projects are they going to allow you to do at any one given time with them? Is it one? Remember, we’re talking about scale. You want to be able to do more than one project at a time and with a place like RealtyShares, for example, we don’t have a limit on how many projects you can have, as long as you do have the assets available to support your reserves.
The last thing is what types of loans do they offer? Are they stuck in one type of loan or do you have several different options? If you find a perfect multifamily, for example, can you also finance it with that? What this all comes down to is one simple word. It’s about relationship and that’s what you should be looking for when financing, versus the interest rate.
To drive my point home a little bit more, let’s look at $150,000 loan at 9%, versus $150,000 loan at 10%. We’re talking a total over six months of $750. Sounds crazy when you think about it, right? All the hard work and everything you’ve done just for $750 extra.
Now, every penny counts in this business. It’s a business of margins, for sure. But even if you went to 11%, $1,500, isn’t the peace of mind knowing that your deal is on it’s way to close worth that extra money than struggling and talking to 15 different people to figure out which deal is best when we’re literally talking pennies? So quit stepping over dollars to pick up nickels and next time think about who you’re doing business with.
Thanks for listening. My name’s Kelly McDonald. I’m the vice president of sales at RealtyShares. My email address is [email protected] Love to hear your thoughts or feedback and I look forward to next time.
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