You should use a hard money loan for your real estate fix & flip. Here’s why!
Flipping houses can very lucrative if you know how to do it right. But funding flips is the most important because you can’t do fix and flips without the money, right? Real estate investors who are buying fix and flips with hard money loans know that it’s a great way to make money and build wealth fast.
Here’s what you need to know if you’re considering using hard money loans for your next fix and flip.
Real estate investors have limited funding options to choose from when buying investment properties because good deals don’t wait for bank loans or appraisals. This short article will focus on hard money loans and why they are such an attractive option for investors who are interested in doing fix and flips.
What’s a Hard Money Loan and why would you want one for a fix and flip?
A hard money loan is a type of loan that is very different from traditional financing options like conventional loans, or bank loans, because it funds quickly and with less requirements. Example: Most hard money lenders don’t have a minimum credit score to qualify. But like any loan, the borrower agrees to pay back the loan with interest. The interest rates for fix and flip hard money loans range from 10% to as high as 18%.
Why are Hard Money Loans Attractive to Investors for Fix and Flips?
Hard money loans are attractive to real estate investors who do house flipping because they fund quickly and there’s not a lot of hassle in getting the funding. Many savvy investors regularly use hard money to buy a fix and flips because it can fund much quicker than a conventional mortgage loan which can drag on for months.
How to Get a Hard Money Loan for your Fix and Flip
To get a hard money loan, you’ll need to find a hard money lender who is willing and able provide you with the funds that you need for the fix and flip. You’ll also need to be pre-approved by a lender before the lender will agree to loan you the funds, so it’s important that you get started looking for lenders right away.
If you are able to find a lender who is willing to lend you money on a property purchase, they will need the information for the property you are looking to purchase to give you final approval. Most hard money lenders can fund quickly in 3-5 days if there’s no appraisal requirement. Appraisals tend to slow down the funding process so not all hard money lenders require appraisals determine property values.
The Benefits of Using a Hard Money Lender vs Traditional Financing
The primary benefits of using a hard money lender versus using traditional financing include: the speed of funding, no minimum credit score requirement, and no hassle loan approvals. The speed in obtaining financing can often be the single most important factor in being able to buy a property at a good price and make money!
When should I consider borrowing from a Hard Money Lender instead of going through more traditional means like banks or mortgage companies? In a competitive real estate market, unless you are operating with a lot of cash on hand, you need a loan that can fund as quickly as cash. Many sellers won’t even look at an offer to purchase unless it’s a cash offer. Because our fix and flip loans can fund as quickly as cash, they are essential for funding your property purchases in a competitive market.
Common Misconceptions About Hard Money Loans for Real Estate Deals
There are a few misconceptions about hard money loans that need to be cleared up and these include:
– Private money loans are offered only to people who have poor credit and cannot qualify for more traditional types of financing. Wrong. Most hard money lenders don’t have a min credit score. Not all real estate investors have poor credit, in fact, many real estate investors who use a private lender actually can qualify for a bank loan.
– Hard money lenders are all loan sharks that charge excessive interest rates. Wrong. Hard money lenders are debt partners for real estate investors, providing the capital they need to make money in real estate investing.
– Hard money lending is the most expensive option for funding investment property purchases. Wrong. Using your own cash is your most expensive option for funding your fix and flips. And a partnership is also much more expensive than a hard money loan.
While it’s true that many hard money lenders don’t have a minimum credit score requirement, or run a credit check, that’s not the reason real estate investors choose hard money. Real estate investors can use hard money loans on multiple projects simultaneously, building their real estate portfolios faster.
What kind of down payment is needed for flip financing?
Generally, you’ll need at least 20% of your total project cost to get a hard money loan for a fix and flip. But it really depends on each private money lender’s requirements.
Draw Schedule for a Fix and Flip
If a hard money lender provides funds for the repairs to a property, these funds will often be held by the lender in an account called a “repair escrow.” The lender will then release the repair money in draws, or disbursements, as the repairs are being completed.
In order to communicate to the lender how the funds should be disbursed, expect to fill out what’s called a “draw schedule.” A draw schedule should match the bid for repairs, with a cost next to each item, and a grand total at the bottom. But the only difference between a bid for repairs and a draw schedule is that a draw schedule outlines the work in phases so that a lender knows when funds should be disbursed, and who funds should be disbursed to. The lender will disburse the funds to the borrower in “draws” as the repairs are completed, according to the draw schedule.
When to Pay Back the Hard Money Loan on a Fix and Flip
A borrower will need to pay back the hard money loan on a fix and flip property when the property is sold. Some hard money lenders require monthly payments until the loan is paid back, while some lenders do not require monthly payments.
What additional information do you need to obtain a loan for a fix and flip?
Purchase price and loan amount: How much of a down payment will you need?
Rehab and renovation costs: Projected rehab costs can be found by contacting a local contractor and asking them to provide an estimate in writing. Does your lender provide funding for rehab costs?
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Rehab time frame: You want your flip to be completed quickly so you pay less interest to your hard money lender.
After Repair Value: What is the property value after the renovation is completed?
Worst Case Scenario: What’s your exit strategy if things go south? If you get injured, go over budget, or the house doesn’t sell in a timely manner, how are you going to pay pack the loan?
Loan to value: The more money you bring in, the better your chances of obtaining the lowest interest rate.
Experience: Your experience in real estate investing can have an impact on the lender’s decision.
If you’re considering a fix and flip property, hard money is the best option for financing your project.
We’ve outlined some important considerations below that should help you decide whether this route will work for you.
Are all of your questions answered? Remember, no question is a dumb question when it comes to hard money loans, so reach out to us to get more information about how our hard money loans work. You can apply for a fix and flip loan here.