- Hard money lender-These are individuals in the market that finance investors/rehabbers for short periods of time (less than 1 year and typically for 6 months) for higher than bank’s interest rates or a large percentage of the flipping profit. They will generally take a creditor position against the property to protect their investment. Your closing costs will be lower as their is no bank involved to charge fees. If you chose to hold the property, you will replace the hard money lender with a traditional mortgage. They can also make a great advisor for your first house flip.
- Construction loan-This is generally the best was to finance your flip to secure as you should be able to borrow not only the initial purchase amount, but much of the rehab costs also. Often you will need to contribute 5-10% of your own money and can then borrow 80-90% of the repaired value of the property. This method is typically easy to convert to traditional financing if you chose to hold the property. The initial construction loan also traditionally has lower closing costs.
- Traditional loan with flipper infusing cash-Many first-time flippers will make the mistake of using a traditional financing product to purchase the property. They will then spend their own money to fix up the house, waiting till it sells to recoup their cash investment. This method requires the flipper to have all the necessary funds available up front to not only rehab the property but to also hold it during the sales process. Then, if you decide to hold the property, you will no choice but to refinance to pull your cash out to continue doing other flips.
There are many other complex and interesting ways to finance your flip which are beyond a short blog post, such as: self-directed IRAs, credit cards (yes, many people do it!), limited partnerships, and borrowing against the cash value of your life insurance.
Researching your different options for financing your flip in advance will make this process much smoother and should help you put more money in your pocket.
2 comments
#1Jeanie Hoholik ~ Twin City Real Estate ChatJune 18, 2008, 7:55 pm
And, after your Scott helps you find the right home to make a profit, you can use the extra cash to put down on the next home. These properties are priced low enough to make enough profit to use that extra cash for the next little venture. Obviously, I’m making a point to the flippers who got stuck the last go’round.
Cash is king. It can be done. The key is not to give up, keep on moving with your properties. It’s fun, profitable and gratifying!
Life is good!
#2Grace@Hard Money LoanJuly 18, 2010, 3:09 am
A hard money loan is definitely a good source for investors looking to leverage their cash and a quick closing. The only thing I disagree with the author of this post is that hard money loans actually will have higher fees than a conventional bank because hard money lenders charge higher points plus all other fees and costs. This is in addition to higher interest rates as well.
Even with higher fees and rates, hard money is still worth it in order to close on a deal fast so you don’t risk losing it to someone else. Most conventional banks cannot fund nearly as fast as hard money lenders do.
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