How to fund fix and flip real estate investment projects
Fix and flip real estate investment shows on television have skyrocketed in popularity, inspiring thousands of new investors to get in the game. However, it seems as though these shows never explain how to get the real estate capital to fund these incredible opportunities. After all, few Americans have a stash of cash to buy, fix and resell real estate successfully. That’s where hard money lenders come in.
You likely won’t see private money lenders or hard money lenders on the home flipping TV shows, but they are often integral to the process of real estate flipping in America. In fact, procuring private or hard money loans is usually the first step to fix and flip real estate investing.
Why do fix and flip real estate investors use hard money loans instead of bank loans?
Because of the nature of the fix and flip real estate investing business, banks and traditional mortgage lenders will usually NOT write loans on many of these deals. That’s because the properties are in disrepair and banks do not want to risk getting stuck with real estate that they cannot easily recoup their money on.
Fix and flip and real estate investment funding is considered high risk, in that these deals are easier to walk away from than mortgages for primary residence purposes. That’s also why banks and conventional mortgage lenders literally base loans on the repayment ability of the investors themselves, rather than entirely on the property value.
Fix and flip real estate loans fund the purchase and costs of renovation of a house, multi-family home or commercial building for future sale or lease. Most of these loans are short term and have higher interest rates and perhaps more points involved, but are easier to qualify for as the funds are secured by the After Repair Value (ARV) of the property.
Often, the real estate flipper is able to put up a smaller down payment than is required for a conventional bank loan, and may even be able to get a loan with a lower personal credit score and a higher allowed debt-to-income ratio.
In many cases, fix and flip real estate investors will use hard money and private money loans simply to get from purchase to fix, and then replace the original loan with a conventional bank loan at a lower interest rate if they intend to hold the property long term.
How to successfully use hard money to fix and flip a property
To make borrowing hard money to fund a fix and flip real estate project profitable, it’s vital to plan your work well and keep to your budget and your deadline for completion. First, lock in a low sale price compared to comparable properties in the neighborhood that are in good repair.
Make sure and get a professional estimate of repair costs and the amount of time the project will take to complete so that there are no surprises that will cut into your profit margin.
Calculate the cost of borrowing the money you need to purchase and fix the property, as well as how much it will cost to sell the property (including real estate agent fees, closing costs, etc.). Figure out how much you can afford to pay in interest, points and fees
Next, secure your hard money loan. LendVent will connect you with the best hard money lenders and private money lenders to meet your individual funding needs with terms that fit your deal. Create your profile now and choose your lender to get started on your fix and flip project today.