There is a lot of money to be made in the real estate investment business. But while the HGTV celebrities make it look easy, for the rest of us, success is all about putting in that sweat equity. Of course, you probably also need access to cash to make your flipping or new construction dreams a reality. This is where a hard money lender enters the picture.

The benefits of working with this type of lender are clear:

• Hard money lenders give you the opportunity to scale: Instead of putting 100% of your cash on hand into one property, you can put in 20% with the lender covering 80% and invest in five properties for the price of one.
• Hard money lenders have more flexibility than typical big banks: They evaluate borrowers on the basis of their real estate experience, cash on hand, credit, and the future value of the property after it’s fixed up (AKA the after repair value or ARV).
• With a hard money lender, you’re getting more than a financial backer. You’re getting a knowledgeable business partner who has at least as much “skin in the game” as you do.

To ensure you reap the full benefits of working with a hard money lender, you’ll want to choose a company whose goals are aligned with yours and who will deliver on their promises. Before you choose a lender for your next real estate venture, check out these five tips.

1. Work with a Local Lender

First, working with a local lender is key. Real estate investing is a “block by block” business. Depending on the city, the same house three streets over could be worth 20% less. This means, an underwriter in California will not understand the complexities of a deal in a specific Jersey City neighborhood.

Because a hard money lender is not simply a financial backer, the best lenders will know your market and be able to tell within about 10 minutes of speaking with you whether they want to move forward with you. Hard money lenders need the loan to make sense for their investors and need assurances that the borrower is capable of executing on the proposed project.

2. Understand the Lender’s Business Model

Because the lender will be carefully vetting you, you want to vet them carefully as well. Remember, you should approach your relationship with your hard money lender as you would any relationship with a business partner.

Figure out what is most important to you and then ask the appropriate questions. You’ll want to know how the organization is structured. Will you be talking to the decision makers or only a junior underwriting analyst? At Asset Based Lending, our underwriters are principles in the firm. This means they have the power to say “yes” or “no” based on guidelines we establish together. They also have the power to make exceptions. But not all hard money lenders follow this business model.

3. Research the Lender’s Track Record

It may go without saying, but you want to learn as much as you can about the lender’s track record. This means reading the fine print on the website and reading any online reviews, of course. But more importantly, it means asking other local investors, service providers, and commercial real estate agents whether they’ve had experience working with the lender.

4. Choose a Lender Specializing in Your Project Type

Because every real estate investment project is a little different, it can help to find a lender who specializes in the type of project you want to undertake. Are you a seasoned flipper looking to expand operations? Are you looking to move from the new construction market into rental properties? Do you see opportunities in commercial real estate?

Whatever your goals, make sure your lender has considerable experience working with borrowers on that type of project. This way, you’ll gain from their experience and increase your chances of success.

5. Consider Whether the Deal Makes Sense

Finally, make sure you understand the loan details and they fit your business plan. Many lenders advertise low pricing and high leverage, only for the borrower to find out later that excessive fees and hidden costs make the deal more expensive than originally intended.

In addition to pricing, there are other costs that might be more complicated to calculate, like speed. Does the lender have the ability to quickly and reliably reimburse for construction/rehab draws? If not, this can hold up a project and have a huge impact on your bottom line! Make sure you’ve evaluated all of the costs and benefits involved in working with a specific lender and that the deal is sufficiently profitable for the risk.

Doing the proper research ensures you find a hard money lender who understands your unique needs. We are excited to help make your next real estate venture a huge success