Do you remember the fix-and-flip boom of the early to mid-2000s? Back then, it seemed as though everyone and his brother was investing in residential fix-and-flip properties with the hopes of striking it rich. Some of them funded their acquisitions with hard money. Others went to their neighborhood banks.
Things are a bit different today. Fix-and-flip is still a good investment strategy if you know what you’re doing and you’re willing to take significant risks. However, there are not nearly as many hard money lenders willing to finance fix-and-flip projects. Willing lenders are out there, they are just harder to find.
So what’s the deal? We can answer that question by looking at the ins and outs of hard money for fix-and-flip. Let us begin by discussing the concept of risk.
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All Lending and Investing Involve Risk
Whether you are a fix-and-flip investor or a hard money lender, every project you put your money into comes with a certain amount of risk. Risk is just a normal part of lending and investing. Moreover, lending is really just a form of investing. Both private and traditional lenders lend out money with the expectation of getting it back with interest.
Risk is what keeps so many hard money lenders out of the fix-and-flip game. This includes Actium Partners based in Salt Lake City, Utah. They prefer to invest in less risky commercial real estate. Their loans tend to fund things like office buildings, industrial complexes, and retail properties. They don’t do fix-and-flip loans.
As for fix-and-flip investors, they are also taking a risk by seeking out hard money. Hard money loans are easier to come by and can be arranged more quickly, but lenders cannot afford to be as flexible should an investor fall behind on his payments. Falling behind cannot even be an option.
Why Hard Money Is Attractive
Despite the risks, fix-and-flip investors find hard money attractive for a number of reasons. First and foremost, accessing capital is faster with hard money. It does not take a hard money lender months to approve and underwrite a loan. The average time for approval and funding is just a couple of weeks. Some lenders can do it in days.
Speedy funding is right up a fix-and-flip investors alley. Why? Because investors tend to want to get properties purchased, renovated, and back on the market as quickly as possible. The quicker they can sell renovated properties, the faster they can get their money out of them.
Another advantage of hard money is its asset-based nature. Fix-and-flip investors demonstrate an unconventional source of income that cannot be proven with a W-2 form. That may be a problem for banks, but it is not for hard money lenders. So funding fix-and-flip projects tends to be easier with a hard money lender if you can find one that specializes in fix-and-flip.
Loan Rates and Terms
Fix-and-flip investors should understand that hard money tends to come with shorter terms and higher rates. This ultimately adds to an investor’s risk. If an investor cannot sell a renovated property fast enough, he could find himself unable to repay his loan. This is a worst-case scenario that investors want to avoid.
Fix-and-flip represents one way to make money in real estate. Most investors rely on financing to obtain and renovate properties. Hard money is one way to finance, but it does come with its risks. Yet an investor with no other options might have to turn to hard money by default. The ins and outs of hard money for fix-and-flip projects certainly give investors a lot to think about.
