Fix and flipping is the real estate strategy of finding a undervalued or derelict home, buying it, fixing it up and then selling it for a profit as quickly as possible. Flipping homes can be a very lucrative part time or full time job. It's not unheard of for someone to see a 20% to 30% ROI in 6 months.
While finding a rundown home at a discounted price and hiring a great contractor referred to you by your network of contacts are both vital parts of executing a successful deal, procuring funding for these types of projects is often a real estate investor's biggest obstacle.
In this article we navigate the murky world of hard money lenders, otherwise known as private money lenders or bridge lenders.
Hard money lenders supply short term financing to real estate investors for different reasons, including 1031 exchanges, inheritance loans, refinances, purchases and fix and flips.
These private money lenders generally lend their own money or manage a pool of funds from different private investors. They differ from a traditional bank loan in that they are primarily concerned with the underlying value of the asset rather than a borrower's credit score or other financial history.
These loans are especially great for fix and flip investors due to the speed at which they can be funded and the fact that they are designed for short term needs, such as bridging cash flow between the time a house is fixed and and when the house is flipped.
Most lenders can deliver a loan in as little as 5 to 7 days, whereas a traditional bank can take over 30 days. Every bridge lender has different criteria but most will lend at a 60% to 80% loan to value ratio with 100% financing on the rehab costs.
The fact that the fix and flip investor only has to come up with 20% allows them to create leverage. For example on the purchase of a $1 million property the buyer may only need to come up with 200k to make the deal work.
Another advantage to a hard money loan is sellers view an offer from a buyer with hard money lending financing as a stronger offer than a buyer with big bank financing because banks have been known to rescind loans before the close of a deal.
This gives the buyer the ability to quickly close hot deals in the marketplace because the financing process is so much faster.
Shop around and make sure to get quotes from 3 to 4 different lenders to ensure you are getting a fair deal. Remember that "hard money" is really just "private money" that is secured by a hard asset. So reaching out to people in your network can be a great way to find a private lender.
Hard money is a niche industry and there are not a tonne of big players. As a borrower you should always do your due diligence and understand who you are working with before you sign on the dotted line.
Russ Barneson is head of marketing for Crescent Lenders, a private money lender based out of Los Angeles, California which lends on both commercial and residential real estate properties.
He is also the creator of the Hard Money Blog where he discusses all aspects of real estate investing. Russ enjoys traveling, reading, and surfing in his hometown of Pacific Palisades, California.
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