Research hard money lending and you will discover that most hard money borrowers are real estate investors. You will also discover that there are lots of strategies for making money in real estate. One of them is the fix-and-flip strategy. Fix-and-flip can be financed in any number of ways, including hard money.
The Fundamentals of Both
Investors need to know a couple of important things before funding their fix-and-flip projects with hard money. But before I get to that, let us discuss the fundamentals of both – just in case there are new investors reading.
Fix-and-Flip
Fix-and-flip is an investment strategy that focuses mainly on obtaining fixer-upper and distressed properties. Most of these properties are residential; some are commercial. The idea is to buy a property at a lower-than-market-value price made possible by its current condition. The investor then repairs and upgrades the property before putting it back on the market. He hopes to sell it for more than he put into it.
Hard Money
As for hard money, it is a form of private lending that is easier to secure than traditional bank loans. It is well suited for real estate investments because hard money loans are backed by collateral. Investors put up the properties they are obtaining as collateral for the money they want to borrow.
Key Things Every Investor Should Know
With the fundamentals out of the way, let’s talk about some of the key things that investors should know about hard money before using it to fund fix-and-flip projects. A good place to start is the lender.
Some Avoid Fix-and-Flip
You would be hard pressed to find a hard money lender unwilling to invest in commercial real estate. However, fix-and-flip properties do not fit the commercial profile. They are considered residential properties despite the fact that investing in them is a business proposition. Therefore, some hard money lenders avoid fix-and-flip projects.
Salt Lake City’s Actium Partners is one such hard money lender. Actium prefers to stick with traditional commercial investments with lower risk profiles. There are fix-and-flip lenders out there, but an investor may have to dig around a while to find one.
Interest Rates Are Higher
Investors should also know that interest rates on hard money loans are higher than their traditional counterparts. This isn’t necessarily a problem for a commercial property investor who only leans on hard money to complete the initial acquisition. But it can be a problem for fix-and-flip investors.
If a fix-and-flip investor can arrange a short-term bank loan instead, the lower interest rate afforded by bank financing would be better for his bottom line. On the other hand, if all he can arrange from a bank is a long-term loan, a short term hard money loan might be a better deal.
The Property Must Have Value
The most important point of this whole discussion is that a property must have intrinsic value in order for a fix-and-flip investor to get a hard money loan. Hard money is asset-based, meaning the value of the property needs to exceed the amount the investor wants to borrow. Otherwise, the loan will be a non-starter for a hard money lender. Subsequently, fix-and-flip investors need to have a bit more cash to make up for a much lower LTV.
Funding a fix-and-flip strategy with hard money is not impossible. Yet it’s not necessarily easy, either. An investor needs to find a lender who shares his vision and is willing to work with him. If he can do that, he will be alright. Otherwise, he may have to fund acquisitions with traditional bank loans.
