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Why Private Loans Are Better than Bank Loans for Fix and Flip Deals

private money lender

Traditional lenders are typically cagey when it comes to lending for fix and flip properties. This is because the properties in question often require extensive remodeling and there’s no set time on when the project will be completed. The entire business model is a bit too speculative for their conservative tastes.

Luckily, hard money lenders follow a 60%-80% loan to value ratio, and they are friendlier for this business than banks. The following are some of the reasons why you should choose a private money lender over a traditional bank:

Credit rating doesn’t matter as much to private lenders

Low credit ratings have locked out many people from getting business financing from traditional lenders. In the conventional setting, your creditworthiness is determined by how well you have repaid your loans in the past, including hard-to-pay student loans, credit card debt, and more. Your debt to income ratio also plays a vital role in informing your intended lender’s decision on whether to loan you the money or not. Many people who would otherwise be able to repay their loans are left out due to banks’ conservative application of these terms. If you’re confident that you can pay back the loan quickly despite having low credit, investing in the help of a private money lender is a far better option.

This is because private loans aren’t concerned with your credit score. Thanks to high interest rates down the line, they can be sure that their investment is protected. If you manage to pay back the loan quickly, it’s a far more lucrative option than going with traditional lenders.

Private lenders process loans quickly

Fix and flip business deals works best in an environment where the demand for houses is higher than the supply. A property that is on sale in such a market will have many interested customers. This is a huge draw for private lenders who can get a return on their loan quickly. If you went to a traditional lender under these circumstances, chances are you will miss your opportunity to procure the house.

Unlike conventional lenders who take time to go through your finances with a fine-tooth comb, hard money lenders do not take as much time. This is because they use the property you buy as collateral.

The main factor that a private money lender considers when loaning you money is the value of the property you want to buy. Once they know the value of the property, they can quickly calculate what they can lend to you. If you are unable to repay your loan, the lender repossesses the property and sells it off to get their money back.

Private money lenders are often more flexible

The fix and flip industry is growing and for good reason, but it is not always straightforward. Sometimes your permits get delayed or you face down a shoddy contractor. In light of these delays, a traditional lender will have established protocols when it comes to lending, processing, and repaying these loans. It is generally tricky for these protocols to be avoided at any point in the borrowing cycle.

To be able to hold on to your property during these possible hiccups, you need a flexible lender. A private money lender is usually an individual or a small investor pool whose loan programs are organized by specialist companies. This simple structure makes it possible for them to offer flexible terms to borrowers at all points in the process.

Choosing a lender

The terms and qualifications of hard money loans vary widely. It is essential for you to check to see which loan program has the conditions that are most favorable for you. Factors such as flexibility and the loan repayment schedule are factors you can consider before borrowing. When you’re ready to start your next project, rely on the experts at GW Private Capital for more information about hard money loans.

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The Financial Side of Fix and Flip

“Flipping” real estate has come into the popular lexicon due to reality television shows and investment seminars that make the process seem simple and easy. While it is possible to build a business out of fixing and flipping real estate, it does require an understanding of the financial side of these transactions.

Because they approve loans more quickly and without the red tape required of banks and mortgage companies, private money lenders (or hard money lenders) are often the lender of choice by fix and flip buyers. Originating in the 1950s, the term “hard money loan” refers to a loan that is based on property assets, not credit. Specifically, by lending on investment property rather than owner-occupied property, hard money lenders fall outside the mortgage laws and, thus, have more flexibility in how, and to whom, they issue hard money loans.

This does not mean that hard money loans are freely given. Hard money lenders are businesses and, as such, require information from borrowers to ensure that their hard money loan represents a sound investment in the fix and flip project. Here are four numbers that will likely be considered before a hard money loan is issued:

Purchase Price

This is the acquisition value of the property. This is not necessarily the listing price if the buyer is able to negotiate a lower price with the seller. When negotiating the final purchase price of the property, buyers should keep in mind that most hard money lenders structure their fees differently from conventional mortgage lenders. Buyers may find it beneficial to speak to hard money lenders first to ensure that they have assets to cover the down payment (discussed next) as well as the fees needed to obtain the hard money loan.

Down Payment

As the saying goes, “there ain’t no such thing as a free lunch.” A key part of the real estate bubble that burst in 2008 was over-leveraging. Entire books have been written on how “no money down” housing loans created an environment where sellers, buyers, and lenders had incentives to act recklessly. But the result is that responsible lenders now expect borrowers to have a combination of good credit, assets, and a down payment. The reason for this is simple – when borrowers bear some of the risk, they have incentives to complete the renovations and flip the renovated property at a profit.

In the case of a hard money loan, the loan is based on the property rather than the borrower. That is, the borrower’s credit history is typically not considered by hard money lenders. Rather, the asset, namely the property being purchased, and the down payment are the sole, or primary, considerations.

The amount of a hard money loan on fix and flip projects is typically calculated as a percentage of the after repair value (or ARV) of the property. The formula for ARV is discussed below. For purposes of the down payment, however, if a hard money lender approves a loan for 60% of the ARV, the borrower will likely need to come up with at least some money for the renovations and down payment on the property.

Current Value

ARV is the sum of the current value and the value of the renovations. The current value of a property is the value in its current state before renovations. While this may be the purchase price in some cases, it is not necessarily always the purchase price. When a property can be purchased at a discount, such as a short sale, foreclosure auction, or another distressed sale, the current value may be higher than the purchase price.

Value of Renovations

This is the driving force behind fixing and flipping rather than just flipping. If a property can be sold at a profit without renovations, it would merely be flipped. However, if renovations would add substantial value to a property, profit can be maximized by fixing it before flipping. The value of the renovations is often difficult to calculate, but should at least exceed the cost of the renovations to make a profit.

In sum, the current value and the value of the renovations, along with the purchase price and the down payment, will often be the key factors in qualifying for a hard money loan.

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4 Steps To Flipping Property Successfully

Fixing and flipping property is a great opportunity to make money in an exciting, fulfilling venture. But you need to follow some basic rules to make that venture successful, otherwise, you’ll see your investment flop. Follow these simple guidelines to make the most of your fix and flip investment property.

1. Know How Much You Can Afford

Flipping property isn’t an inexpensive gig. It requires a lot of capital, and knowing how much you can afford for property and repairs is critical to a successful fix and flip. You may also want to start looking at financing options at this point because some financing solutions, like a private mortgage, won’t cover the full value of the property you want to invest in. It can seem like a chicken and the egg situation; you need to know how much money you have to spend but you also need to know what your options are. Contact a hard money lender to find out what your options are and how they can help you make a decision.

2. Find A Financing Solution

There are several different financing solutions available to fix and flip a property, but which one is right for you will depend on what you need and what you’re trying to do. The most common types of financing solutions include:

  • Private Mortgage
  • Hard Money Loans
  • Fix and Flip Rehab Loans
  • Commercial Real Estate Loans
  • Investment Property Loans
  • Construction Loans

Are you ready to invest? Contact GW Private Capital today.