A popular method of real estate investment is house flipping, where you purchase a house to renovate and sell for a profit. Fix-and-flip financing can be difficult to secure because the project cost is more than it usually costs to buy a home to live in and investors are wary of the risks involved. There are some options, however, for both beginners and experienced flippers, such as hard money loans, private lenders and crowdfunding. Knowing a bit about each can help you choose the right one.
Hard Money Loans
In hard money loans, you secure funding through using the real estate as collateral. These will generally have short terms of less than a year and interest is usually between twelve and eighteen percent plus between two and five points. The points are payable when the real estate sales, giving you more time if it is needed. The amount of these loans are based on the after-repaired value and applications will usually include detailed repair schedules as well as budgets and documentation on comparable properties in the area.
Another loan option for your fix-and-flip projects is private lenders. These types of loans function more like hard money loans than conventional ones, but the lenders are more open to negotiation of repayment than hard money lenders and may take a share of the profits instead of charging interest. To find and vet a private lender, it is a good idea to visit real estate networking events. You can talk to other flippers to get an idea of which lenders are the best to work with and even meet private lenders to partner with for your projects.
Crowdfunding websites designed for flipping and other real estate projects are gaining traction in the industry. These sites offer ways for smaller investors to make profits from grouping together to fund projects and function similar to a hard money loan in that the property is used for collateral, the terms are short and the interest is high compared to a traditional mortgage. Some of these sites will close your loan and then wait for investors to jump in, while others will not close the loan until enough investors have signed on. The process for these sites can take longer than other loan options as you will not have an established relationship with the lenders and multiple people have to weigh the risks and decide independently.
Funding your fix-and-flip project can be difficult as this real estate investment technique is considered risky by many lenders. You can use the property as collateral with a hard money loan, private lenders or crowdfunding, and may be able to negotiate payment terms and interest rates.