Fix and Flip Loans: Not Just for Real Estate Moguls
Fix and flip property loans have become extremely popular over the past few years. Since the housing market has recovered, people all over the country are investing in real estate to earn a living or simply to make some cash on the side.
What is a Fix and Flip Property?
A ‘Fix and Flip’ investment is not the same as purchasing and living in a home with the plan to sell one day. At the very core, fixing and flipping a home is the process of acquiring a distressed or run-down property at cheap price with the intention of doing a complete renovation and immediate sale. Once the renovation is complete, the property is sold for a much higher price than it was originally bought for. There are many ways a renovation can improve home value, check out this resource from Investopedia for more information.
How can you secure funding?
There are a lot of people who would love to fix and flip properties to make money. However, the biggest obstacle is getting the funding to do so. Even if you are able to pay for the property out of pocket, the endeavor is expensive and risky.
Another sizable obstacle is the fact that banks typically will not offer long-term financing for a fix and flip loan as they usually finance properties to be held long-term. They don’t like offering short term loans because the returns on their loans are focused around long term mortgages.
Fix and flip properties are usually sold within a year after being purchased. As banks will not usually lend in the short-term, the buyer must find a loan to get the proper financing for a fix and flip property. Cue hard money.
Hard Money Lender
Using a hard money lender like Source Capital Funding, Inc. is an easy way to get short-term financial support with more flexible terms and conditions than what the banks offer. Hard money lenders will provide a loan based on the value of the property after it has been renovated. This is known as ARV (after repaired value). For example, let’s say the lender will provide a loan of 70% of the ARV. If you buy a property for $100,000 and the ARV is $200,000, the lender will provide a $140,000 loan. After purchasing the property, the buyer will need to provide an estimated cost of repairs and a plan to turn the distressed property around.
These types of loans are done very quickly, usually within a day or so. Most hard money lenders charge between 12 and 16 percent interest.
Worried about finding a hard money lender? Don’t be – hard money lenders are everywhere. However, most of them only lend in certain states, whereas only a few will lend nationwide. When finding the right hard money lender, it is best to start on a statewide search and work up to a national scale if needed.
Be aware that some hard money lenders only fund certain types of deals, and you’ll need someone like SD Equity Partners, who specializes in hard money loans for fix and flip properties.
Private Money and Crowdfunding
Using private money to finance a fix and flip is another great option if available. Private money typically comes from family, friends, or private investors. These loans are built around relationships and trust.
Crowdfunding is a relatively new way to finance a fix and flip. Crowdfunding is the practice of financing an endeavor by raising many small amounts of money from a large amount of people. In regards to fix and flips, crowdfunding works very similarly to hard money lenders. Only instead of the funding coming from a single lender, financing comes from number of different investors.
Crowdfunding for real estate should be approached very carefully. A good place to start is with a full understanding of the JOBS Act. The JOBS Act allows flippers to solicit the fact they are raising money for a real estate deal to a broader range of investors. Before the JOBS Act, a flipper could only advertise deals to investors of whom they had a pre-existing relationship. There are many crowdfunding sites available in which you can do the proper research on investors and their interests to effectively organize your efforts to get the best possible return.
You shouldn’t let funding get in your way of fixing and flipping a home. All it takes is proper assessment of your strategy and the proper research. Any distressed property comes with risks. Make sure you are working with professionals and have a fantastic team with you. It is very difficult to flip a home by yourself.