When you make the decision to enter into the world of real estate investing it can seem a little overwhelming. Although, there are many factors that go into becoming an investor, the one thing that can be simple and clear is the financing.
The majority of the time a fix and flip project needs financing. You need money to make money, as the saying goes. The point of a fix and flip project is to renovate a property and sell it for a profit. The first thing you need to figure out is how much funding is necessary to complete your project. The most popular financing for these types of projects is private money, or hard money.
Hard money means you are borrowing from either an individual or private company; and although they operate similarly to conventional banks, they have their own requirements and terms. Because they do not have to adhere to strict FDIC rules, there is a much faster approval time. There are two main reasons borrowers opt for a hard money fix and flip loan: quick money or not having the qualifications for a conventional mortgage.
Hard money lenders provide loans that are backed by real estate assets. These loans can be used to purchase residential properties, such as condos and houses or buildings that will be used for business. When you begin your search for financing, make sure you have a concrete plan that will give you confidence. When you walk into a lender’s office with confidence and a plan, they are much more likely to feel confident in lending to you.
A hard money lender will look at the after-renovation value (ARV). What that means is what the property will be worth after all repairs and renovations are complete. Typically, lenders will finance up to 80% of the ARV. Let’s say you find a property and the purchase price is $65,000. Once, it is evaluated, it is determined the ARV will be $115,000. Your hard money lender would finance $92,000. That leaves the borrower with $27,000 for repairs, fees, etc. The property itself is used as collateral in case of loan default.
Unlike traditional lending institutions, with strict, rigid processes and lengthy documentation requirements, hard money lender have more freedom and can work each loan according to the borrower’s situation and needs. This creates much less hassle for the borrower. Another bonus, hard money lenders typically don’t charge penalties for early payment of loans. What that means to you, is if you are able to renovate and sell the property faster than anticipated, you will not be penalized. On average, fix and flip loans can be approved and funded between 7 to 10 days.
Hard money fix and flip loans are much less hassle than a traditional mortgage.
Find a property, make a plan and research hard money lenders. When working on a fix and flip project it is best to work with a lender in your state, or one who is familiar with your state’s regulations.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.