If done correctly, flipping homes can yield significant financial rewards. The first and most important step in any fix-and-flip project is securing financing for the acquisition and renovation of the property.
The use of leverage, or borrowed capital to increase the potential return of an investment, is well-known among real estate investors as a fast and easy way to amass wealth (ROI).
Whether the borrower is a first-time investor working on a single flip or an experienced rehabber juggling multiple properties at once, a fix-and-flip or bridge hard money loan can be a useful financial tool. Keep reading to learn why hard money loans are a great choice for real estate investors who plan to fix and flip properties.
What makes hard money appealing for your fix-and-flip project?
Use Trustworthy Funding
Hard money allows a fix-and-flip investor to take advantage of the trusted lender's ready funds and quick turnaround time. The term "leverage" refers to the practice of investing with the funds of another party. You can buy more investment properties with the money you save by using a loan, but there is risk involved.
Hard money loans are popular for real estate flipping because they reduce the amount of personal capital required to purchase a property and make it marketable. These well-planned loans enable you to make necessary renovations with as little as 15-30% down, allowing you to take on projects gradually (depending on the lender).
Approval and qualification are simple
Real estate investors often turn to short-term, hard money loans to finance "fix and flips" and other types of real estate investments. The value of the real estate transaction, rather than the borrower's credit history, will determine whether or not the loan is approved.
Loan-to-value (LTV) ratio, After Repair Value (ARV), and other indicators of a property's potential for profit are used by borrowers to apply for hard money loans. The entire process, from application to approval or denial, can be completed in a matter of days or weeks rather than the months it takes for a conventional mortgage.
As soon as you apply for a hard money loan, the lender will look into your financial situation to make sure you have the means to make the monthly payments, and they may also do a soft credit check. When applying for a hard money loan, the lender won't need to look too deeply into your credit or employment history, making this process smoother. However, because of the greater potential for loss associated with these loans, interest rates tend to be higher.
Speed to market
Hard money is preferred by investors due to the impatience of the market. A hard money loan provides immediate funding after a reasonable evaluation of a business deal, allowing you to quickly move forward with the rehab phase of a project.
If you don't have a large amount of cash on hand and you're trying to compete in the real estate market, you'll need a loan that can fund as quickly as cash. For the most part, sellers won't even consider an offer to sell unless it's paid in cash. Fix and flip loans backed by hard money can be funded as quickly as cash, making them ideal for financing real estate purchases in a hot real estate market.
How Hard Money Loans work for Real Estate Investors
Qualification
The process of obtaining a hard money loan is different from that of a conventional mortgage. Hard money lenders, as previously mentioned, are less concerned with things like your income and credit history. Instead, they'll want to make sure the deal is solid and that the property's after-repair value (ARV) supports the amount of money you're asking for.
When deciding whether or not to grant a loan, hard money lenders focus on the details. They analyze the deal and the project's economic feasibility, and they help you come up with a way to get out of the loan before it expires.
Lenders care more about the collateral and the deal than they do about the borrower themselves when making a lending decision. However, the specifics of your agreement will be established between you and the hard money lender you choose, as well as by your individual circumstances. The following are some of the more common prerequisites or qualifications.
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Location- A large percentage of hard money lenders only serve their immediate geographic area or a select few. However, many have a nationwide presence; Nvestor alone lends in 42 states and continues to expand.
- Home Flipping Experience- As a beginner, your rate could be higher than average. However, as your business grows, your lender may be willing to negotiate better terms and lower rates.
If you are a real estate investor with at least three successful exits in the last 24 months, Nvestor Funding will tailor a solution that takes advantage of your track record to provide you with preferential terms, such as lower closing costs, tailored points, and even faster closings. - Property Type- Here at Nvestor Funding we fund asset types such as single-family, multi-family of up to 20 unit homes, townhomes, condos, & some mixed-use.
What is the After Repair Value (ARV)
Your lender will evaluate the home based on its projected growth in value and the current market price of similar homes in the area. They will pay a predetermined fraction of the property's after-repair value based on an appraisal.
The lender will need to know what kinds of upgrades you intend to make in order to come up with an accurate ARV. To do this, you need to refer to your SOW. Most hard money lenders will require you to submit a statement of work (SOW) outlining the scope of work you plan to do on the property. It typically outlines a timeline for the completion of the renovations, as well as a budget and roles for all parties involved.
Once you have provided your hard money lender with a comprehensive SOW, they will evaluate your property in relation to similarly rehabilitated properties in the area. Assume, for the sake of argument, that the basement is unfinished but will be finished as part of the project. You can expect your ARV to be in line with the prices of similarly situated homes that have finished basements. Your ARV will rise and you may be able to get a larger loan because of the increased value of your home compared to similar properties without a finished basement.
How is the Rehab of the Property Financed
Financing repairs and renovations is a strong suit of hard money loans for the "fix and flip" market. Many private money lenders will finance the full cost of renovations and disperse the funds over a predetermined number of draws.
The full amount of a rehab loan is not typically dispersed by a hard money lender on the day the loan is closed or the first day of construction. The loan proceeds are disbursed in "draws," or installments, based on the achievement of milestones detailed in the statement of work (SOW).
Draws are reimbursements for specific construction or repair jobs. Basically, you'll be responsible for covering the costs of any labor and materials, but the lender will pay you back afterward. The lender will release the draw to reimburse you for the work after you've reached each milestone (or phase of the project), at which point an inspector will visit the property to verify that the work was completed to lender standards.
The process continues until the renovations are done; you notify the lender that the second draw is complete, we send an inspector to verify it, and then release the draw to you. Keep in mind that most hard money lenders won't pay for work done by unlicensed contractors, even if it's warranted unless you've established a solid reputation for completing projects on time and to high standards.
What is the process like working with a Hard Money Lender
Getting a hard money loan is not something your regular bank will offer. Private individuals or real estate investment banking firms are the most common types of hard money lenders. The rules that govern conventional banks do not apply to hard money lenders. As a result, lenders can largely set their own standards for borrowers.
It's important to think of finding a hard money lender the same way you'd think about adding a new member to your real estate investing team. It is important to establish rapport with your lender, just as you would with your general contractor, property manager, or real estate agent.
The right hard money lender will care more about developing a long-term working relationship with you than about making a quick buck.
Before committing to a hard money lender, it's important to do some preliminary legwork, get some recommendations from other investors, and compare rates and terms. After all, your lending partner should be a part of your team, so you want one who's invested in your success as a real estate investor.
Conclusion
Obtaining a hard money loan can be a great way to fund renovation and resale jobs. You can get the money you need from a hard money lender to buy a property, fix it up, and then sell it for a profit.
Are you geared up to take action on your next fix-and-flip opportunity? Investment properties can be purchased and remodeled quickly and easily with the help of Nvestor Fundings fix and flip/bridge loans. Expand your company with the help of our adaptable programs and top-tier team of professionals.
