As you begin investing in real estate, finding financing for your properties can be one of the key hurdles you have to overcome to be successful. The type of investing you are going to do, and your personal financial situation, can greatly affect your options when it comes to financing investment properties. Loans on any investment property are almost always more difficult to get and will be more expensive than a primary residence. In this article we are going to focus on financing for single family fix and flip properties.
Fix and flip loans are short-term loans that usually last from six months to one year on properties that you intend to purchase, repair, and then sell for a profit. Most traditional banks are not interested in these types of loans because they are so short and are generally for properties that need a lot of repairs which makes the loans riskier in the eyes of the bank. So, if traditional banks are not the best choice, then where else should you look:
Hard Money Loans
Hard-money lenders provide financing designed for investment properties. Hard-money loans are short-term loans that last from 6 months to two years. Each hard-money lender will have their own criteria for the types of properties that they will lend on but all of them will loan on properties that need expensive repairs. If you have not researched these types of loans, be prepared that they will have much higher costs than owner-occupied properties. Hard-money lenders typically charge between 10-14% interest and 2-5 points because these are shorter term loans so the lenders will have less time to collect interest and because these loans carry greater risk. Hard-money lenders will typically loan up to 65-70% of the after-repaired value (ARV) of the property so if you purchase the property for less than that amount you can use the remainder to finance the repairs on the property.
Example:
ARV = $100,000 * 65% = $65,000
Purchase price = $45,000 + $20,000 for repairs = $65,000
Why would you choose to use one of these loans? Because for most investors they will be one of the few choices for financing on fix and flip properties… but also because you will not have to put down 25% as a down payment and can use them to finance the cost of the repairs. Don’t ignore these lenders just because they come at a higher price; take a look at your entire investment and if you calculate that you will have to pay these lenders a total of $5K-7K but you could still make $15K-20K and the end, they could be a valuable partner for your house flipping business.
Private Money Lenders
Private money is a loan from colleagues, friends, family members, or other investors. These loans usually come from personal relationships that are developed over time and there is a high level of trust between the investor and the lender. The terms of these loans can be anything that is agreed upon between the two parties. Private lenders will either ask for a return such as 8-10% or they may want to be an equity partner where they will invest their money in return for a share of the profits. Finding people with a lot of money who are willing to lend to you on an investment property is not easy but will usually be much less expensive than borrowing from a hard-money lender. I have worked with many private lenders and I have partnered with them to help finance my business and provide solid returns to these investors, but please take a moment to recognize the responsibility that you are taking on when you accept a loan from a private lender. You are borrowing a large sum of money that someone else has worked very hard for and that should not be done without the experience and skills to keep their money as safe as possible throughout the entire investment project.
Cash from Personal Savings
If you are fortunate enough to have enough money saved up to purchase and repair a property for sale, then this can be another option to finance your investing. Financing the project yourself will obviously save you the most money as far as financing fees and lending costs and therefore leave you with a larger profit at the end but it does mean having a lot or all of your available cash tied up in a project for a long time. If you are only ever planning on doing one project at a time and are comfortable with having your money invested in something that is not immediately liquid, then this can be a solid approach to financing your fix and flip properties. In my business, I am working on multiple properties at a time, so it becomes a good investment for me to pay a partner to utilize their money in order to allow me to fund multiple projects and keep cash liquid for any of those things that might come up.
To Sum It All Up…
There are several options to obtain financing for your fix and flip projects. Take the time to research the different options and really understand the pros and cons of each one. Make sure that you understand the costs, responsibilities, and risks associated with each one. As you learn how to work with different types of lenders, they can play a vital role in the startup and expansion of your investment business.
Nick Disney, Sell My San Antonio House