Tired of watching house flipping shows, and ready to find out what it’s really like? It’s a lot harder than on TV. Contractors need to be paid, you need to budget well, and there are a lot of things to manage. You’ll need a solid team, including contractors and a lending partner. The lending partner can be the key to helping ensure you profit.
Types of Real Estate Lenders
There are a variety of people to lending you money for a fix & flip. There are commercial and residential lenders, national banks, wealthy family & friends, and others in-between. Let’s rank them:
- National Banks: if you’re starting out, this isn’t a great option. They’ll require the highest downpayment, will finance little to no construction and are generally the most conservative lenders. They could only be an option once you have a long-lasting relationship and potentially deep pockets. You’ll get the best interest rate with a national bank, but your chances of being approved for a loan are also the lowest, with a low loan to value to work with
- Local & Regional Banks: Much easier to deal with, especially if you have a pre-existing banking relationship; ask around for referrals, look-up credit unions, or just google local banks for an area. Rates are generally better than national banks, sometimes with higher loans to value. They’ll work with you to get to closing without too many bumps along the way. They’ll sometimes finance construction too.
- Hard-money Lenders: These are my favorite. They’ll give the highest loan amount for both purchase & construction, relative to banks. Their rates are high (often 10%+), with fees on-top. However, they’ll get to closing quickly, sometimes as little as two weeks or even 48 hours. The high rates are tolerable since you’ll only pay them until the property is sold or refinanced. If you need to move quickly or want the lowest cash to close, this option is for you.
- Friends & Family (aka Private Money): If you’re fortunate enough to have wealthy people in your network, let them know your plans. Chances are they’re looking for investments to park money in, and may enjoy helping you, a real win-win partnership. You might need to borrow from a lender first to get a track record to show some credibility.
Building a Track Record
Regardless who you want to borrow money from, they’ll want to know you’re capable of managing the project. Starting out partnering with an experienced investor might be wise, to build your track record. Or get some on the job experience working on someone else’s project. You can even volunteer your time just to benefit from someone’s experience.
Hard money lenders are a good choice. They might get a bad reputation from high fees and interest rates; I argue those lenders and their investors are adequately compensated for the risk they take. Property flipping or rehabbing is risky. They do care about managing risks, and so should you.
By using a hard money lender, they’ll not only check your experience, they’ll check the deal too. They’ll want to ensure the price you pay is reasonable, the budget makes sense, and the after repair value (ARV) is attainable. Your contractor will work with you on the budget, and the hard money lender is the second set of eyes to help you. You’re still responsible, but the more people vetting the deal, the better.
Single-family Hard-money Ledner: my favourite is Lending One – they’re national, and have extremely competitive rates by hard-money standards. Their technology makes them a pleasure to deal with, and the people are knowledgeable too. Use this link to apply and help support this website!
Any questions? Feel free to get in touch.