Using Hard Money to Purchase Detroit Real Estate

Although the credit marks have tightened their belts in lending, savvy investors still have options when it comes to profiting from Detroit real estate. Indeed, there are many investment opportunities of deep value, providing an investor with ample room to create rental properties, flipped homes, or long-term equity holds.

Low cost of foreclosures create ample profits

In today’s market, homeowners facing foreclosure are double in numbers in comparison to a year ago, according to industry data analyzer Realty Trac. Indeed, many economic and historical factors play into the national decline of housing pricing, conspiring against value like a perfect storm.

Consumers were buying into their piece of the American Dream in record numbers, thanks to easy mortgage money from lenders with liberal guidelines. One hundred percent financing, with seller concessions encouraged, meant that nearly anyone could get their name on a deed without any “skin in the game.”

Detroit Real Estate has not been spared its share of the pain. In 2007, Michigan was ranked in third place among the states for failing mortgages and impending foreclosure. Almost two percent of Detroit Michigan properties were vulnerable to foreclosure due to mortgage default.

Taking advantage of hard money for investment properties

In Detroit Michigan real estate markets, hard money can be a useful tool in the purchase of Detroit foreclosures, intended flips or rehabs. Traditionally, this would require significant down payment from the investor because of the low loan to value given. However, for an opportunity to buy valuable properties at a distressed price, hard money may be useful.

With hard money, investors have the power of leverage, which multiplies the return on your Detroit investment properties. You only need to invest a small percentage of the house’s value, such as 10%, yet you earn your returns on the entire value of the home.

For example, you want to purchase a $100,000 Detroit investment property, and you have the option of putting 10% or 20% down on the home. If the value of the home grows to $110,000, then only placing $10,000 down on the home will give you a 100% return on equity. Had you placed 20% down on the home, your ROE would only have been 50%. As long as the profit you reap is larger than your interest costs, then in the long-term, using leverage is always more advantageous.

The supply of Detroit real estate, available at less than half of its appraised value just a few years ago, creates the ideal opportunity to accumulate Detroit investment property or flip a fast rehab.

While declining markets can be tricky, a knowledgeable contractor or handyman can renovate a Detroit rehab into a suburban residential viable rental property or flip sale. For would-be buyers of Detroit Michigan real estate, hard money loans may be the fastest kind of loan transaction to closing, since there is usually no verification of income, employment and credit.

Types of Hard Money Loans

There are several different types of hard money loans available for Detroit foreclosures and Detroit investment properties:

Acquisition Loan

This type of hard money loan is used to specifically buy Detroit real estate. It is ideal for short term holdings, such as a flip, as interest is generally in the teens, typically 11% to 18%. Ideally, the loan would be paid off within a few years from a lower cost source of funds.

Mezzanine Loan

A mezzanine loan is subordinate (in second lien position) to another bank or lender who holds first lien position. It is repaid at the same time that the primary lender is paid off. Sometimes equity is given to the lender, in addition to loan repayment. Debt and equity are blended in the terms of this type of loan.

Development Loan

This hard money loan is used for acquisition plus improvement of a property. The total loan amount is based on the fully improved value, and interest-only payments are made to the lender.

Bridge Loan

A hard money bridge loan is an immediate solution for a resolute buyer who must act quickly. For Detroit MI real estate, a plethora of buy opportunities would present the need for such a loan. These might include acquisitions of commercial buildings, including apartment houses, and commercial businesses and properties. Bridge loans are short term by nature, and are usually paid within two years.

Other forms of hard money can be used wherever equity secures the loan, including construction of new improvements on raw land.

In today’s market, it is important that savvy investors of Detroit investment propertie sand Detroit real estate act decisively. To hesitate on a great acquisition opportunity is to lose the deal and likely future capital growth. Therefore, hard money can be the right leverage for Detroit Michigan real estate investors, even those who may have flawed credit.