Hard Money Loans and Bridge Loans to Fund and Flip Property
In 2021, home flipping hit a 15-year high since 2005 when the average gross flipping profit reached $66,300 above the median purchase price. This is despite the pandemic and lockdown measures in 2020.
The cities that had the greatest increase in flipping ROI in 2020 were Hartford in Connecticut, Rochester in New York, and Milwaukee. Austin, Texas, Philadelphia, San Jose, San Francisco, San Diego, and Washington, DC also saw an increase in house flipping gross profit.
As the popularity of flipping houses continues to increase, many people are becoming interested. However, they are unable to get started because they lack funding. The good news is there are short-term loans flippers can use to fund their flipping business. They are hard money loans and bridge loans.
Want to learn more about them?
Hard Money Loans
A hard money loan is a financing option for real estate investors struggling to find traditional loans from banks. Just like fix and flip loans, the borrower will use a physical asset as collateral for the financing. So, approval for financing is usually based on the physical asset.
This is bad news for real estate brokers and the industry overall. However, it can create opportunities for real estate brokers and the entire industry. So, is buying a home in a recession a good idea?
A hard money loan is a great fit for up to 100% LTV on a transaction with collateral when you need to close fast and take advantage of an opportunity. It‘s also ideal if your credit score is below the traditional bank guidelines if you’re seeking a loan size of $100 up to $5 million.
The loan term for a hard money loan is 1 to 3 years. When borrowing, hard money lenders will not take your credit score into account during evaluation. This is because the loan is asset-based, the funds are usually under protection with real property.
Hard money agreements are also more flexible than traditional loan agreements. How you may ask. You can tweak the agreement to reschedule repayment or negotiate another feature in the agreement.
What you need to know is that hard money loans are not perfect. One drawback of hard money loans is the extra costs the borrower will incur. This is because the interest rates are extremely high. You’ll also have to pay closing costs and other fees before getting the funds.
Fix and Flip Loans
A fix and flip loan is a type of short-term loan that real estate investors use to purchase, renovate, and quickly sell property for profit. As a subset of hard money loans, fix and flip loans are usually secured by real estate property.
Suited for short-term investments, these loans help borrowers to build their portfolios. Approval and funding takes 45 to 60 days, but you can get the loan approved and funded within 10 days.
Standard mortgages are usually 15 to 30 years but fix and flip loans run between 6 months to 24 months. If you need an extension, a lender can offer you a 3 to 6-month loan extension that you can use to flip your property.
To get approved, the lender will check your creditworthiness. However, the decision to approve your loan leans more on the value of the property in question rather than your credit score.
Fix and flip loans have a high-interest rate between 12% and 18% while typical home loans have a 2 to 4% interest rate. What you ought to know is that fix and flip loans cover multiple property types. Whether it‘s a foreclosure, short sale, or bank owned, the loan can cover all.
Hard money loans and fix and flip loans are suitable financing options for your home flipping business. Since they are short-term loans, you can use them to purchase the property, renovate it then sell the property for a profit. By doing so, you can repay the loans and continue building your portfolio.
However, they do have a few drawbacks which is why it‘s important to research not only the lender but the products they offer. By doing so, you’ll be in a better position to make smarter decisions.