You’ve made the exciting decision to hop on the house-flipping wagon or are about to take on your next fix and flip project – and now you’re facing the critical question of how to finance it.
Depending on your financial situation and goals, there are several options available – check out our blog “History Does Not Repeat Itself, but it Rhymes,” to see some of those options.
One financing option that is popular in real estate investment is a hard money loan. In this article, we dive deeper into how a hard money loan works and why it might be a great choice for your fix and flip project.
Understanding Hard Money Loans
If the borrower fails to repay the lender, they can seize and sell the collateral to cover their investment. Oftentimes, the collateral is a property and in the case of a fix and flip project, it would be the property you’re planning to flip.
Lenders are usually less interested in a borrower’s credit score or financial history, but instead focus on the value of the property and the exit strategy, which means how the borrower plans to repay the loan.
Hard money loans are designed for a real estate investor or flipper who wants to acquire, renovate and resell a property quickly. It is also important to note that these are non-owner occupied properties – you don’t take out a hard money loan to add a 4th bedroom onto your house.
A hard money loan usually ranges from a few months to a year. This makes them different from traditional bank loans. And hard money loans can close in days if the applicant checks all the boxes right away. The very fact that they’re processed so quickly makes them very appealing to flippers who are looking for a quick financing option.
This quick turnaround is part of the reason why hard money loans also come with higher interest rates than traditional mortgages and lie often between 10 and 12% – but this number differs from lender to lender. A hard money lender usually won’t cover the cost of the full property, which means that you will need to provide a down payment.
How much you’re going to need to front in loan depends on the lender and the property. Often, this is a percentage of the property’s purchase price or value, with a common range at 20-30%. At Boomerang Capital, we ask for a minimum of 15% of the total amount needed – we’re funding the other 85%.
Can You Get a Hard Money Loan?
Qualifying for a hard money loan depends on the lender you’re inquiring with; however, there are some common key features and qualifications to keep in mind while you’re preparing for application.
Lenders will definitely look at your property’s value and its ARV (After-Repair Value), this will likely play a big part in determining the loan amount. Having a down payment available and a plan for repayment ready will also play in your favor. Other factors that potentially can bring you closer to getting your hard money loan is a good location of your property, a good relationship directly with the lender and overall experience in the fix and flip world – some lenders may prefer borrowers with a track record of successful projects. However, if the property is good, and the ARV is right, then many will loan to first time flippers.
How to apply for a hard money loan at Boomerang Capital
If you’re thinking “Oh, this actually might be something for me!” then we’d like to tell you a bit more about the application process at Boomerang Capital and the things you will need to apply for a hard money loan:
- Purchase Contract: We need to know the sales price, who is buying the property and what title company they need to get in touch with.
- Borrower Application: We will also need to get a little more information about you and your experience as a house flipper.
- Property Info Sheet: We want to hear more about a flipper’s strategy and get to know more about the property.
- Scope of Work: Another important chunk of information will be what work you’ll be doing on the property and the rehab budget.
- Bank statement: This gives us an idea of where your down payment is coming from.
Benefits of Hard Money Loans for Fix and Flip Projects
Financing your fix and flip with a hard money loan offers many benefits and thus makes it definitely worth considering.
For one, the speed and accessibility of a hard money loan sets it apart from traditional loans. Thanks to a (usually) quick approval, flippers can seize opportunities as they arise because of and act fast when needed. This also leads to the potential for higher returns: Securing financing quickly and efficiently can result in more profitable deals and taking advantage of opportunities others might miss.
On top of that, we like the fact that lenders focus on the value of property rather than borrower’s financial history and pave the way for fix and flip projects that add value to neighborhoods and communities.
Another massive benefit is that many hard money lenders understand local market conditions and are a great source of referrals and can connect you with local people. This is why we always suggest seeking regional lenders who can provide you with a deep understanding of the local real estate market your property is in.
We’d love to give you more information and help fund your next fix and flip. We have years of experience and expertise when it comes to financing and flipping houses. We’ve funded over $500 million loans across the country and together with our borrowers, we’ve completed over 2000 fix and flip projects.
References:
https://www.forbes.com/advisor/business-loans/fix-and-flip-loans/
https://www.cnbc.com/select/hard-money-loans/
https://www.instagram.com/p/CrlhR5LtHKA/
https://www.instagram.com/p/CljbTjJOYYx/
https://www.instagram.com/p/CmKEcxcgJQ1/