Flipping Homes with Hard Money Loans
Posted on November 3, 2008
Real estate investors planning to flip houses will often need to take out a loan to purchase the property they are flipping. Some have enough money on hand to pay cash for a property or to use a line of credit, but it can take several years before an investor is able to build up this kind of financial backing. In the meantime you’ll have to make use of a loan or mortgage. Hard money loans are some of the best funding methods to use in house flipping.
Hard money lenders (HML) are often private investors or companies that lend people money based on the property or business deal that money is going to secure. It’s a much faster way to get cash for a real estate investment than going through the red tape at the bank. Plus, the lenders will usually look at the kind of deal you have or the property’s potential resale value when giving a loan instead of your credit score.
In exchange for the chance to get a quick loan, within just a few days, the HMLs will charge a higher interest rate on that loan and high origination fees.
However, many flippers looking to make money flipping houses prefer the hard money loans because they’ll often fund up to 100% of the purchase price for the property.
Common Questions about Hard Money Loans:
What is the average interest rate on a hard money loan?
Hard money loans can charge anywhere from 12% to 18% interest on the amount of the loan. For a loan with 18% interest that can be a 5% origination fee, plus 12% annually.
Are there any other costs?
Yes, most HMLs will require there to be a Title Policy, some insurance on the property and a property appraisal. You’ll also need to put some money down on the loan. So, you should expect to pay the origination points, any discount points and other closing costs before getting the loan. You know what they say, it takes money to make money flipping houses!
Do I make Monthly Payments on the loan?
Most of these loans are only going to be out for 3 months to a year. During that time you’ll make interest payments on the loan. That is, only paying the interest on the loan. At the time you sell the property you’ll repay the HML the full amount of the loan plus any remaining interest on the loan.
Sometimes you can defer the interest to the end of the loan if you know the HML and have completed previous deals with them.
How long is the hard money loan for?
Hard money loans can vary in their length of time. When you take out a loan with the HML you’ll usually write a note for any where between 3 and 12 months. It really depends on the lender and how much time you need to make money flipping houses with these loans.
Will they look at my credit?
HMLs do check your credit, but they aren’t looking at your credit score. Instead they are looking at your history for evidence of bankruptcy, foreclosures, charge offs and listings from collection agencies. They just want to know if you have a history of skipping out on paying back loans and bad debt.
It’s possible to have a low credit score, but not have any bad marks on your credit history. So, hard money loans are a good option for young real estate investors and those who don’t typically carry a lot of credit.
How soon can I get the funds?
You can get access to a hard money loan within 3 days from them receiving the final documentation for a loan application. This allows investors to move quickly on a property deal that they find
What’s the most I can get on a hard money loan?
HMLs will usually only give hard money loans up to 70% of the after repaired value (ARV) of a property. That’s about 30% less than the selling price of the property once you get it rehabbed and placed on the housing market. This practice helps ensure that an investor will be able to pay back the loan and still make money flipping houses.
Hard money loans are a great idea for short term property investments. They are not a good idea for a long term real estate practices such as land lording because of the high interest rate. However, those investors looking to make money flipping houses can easily use the hard money loan to their benefit.
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