The house flipping trend has skyrocketed in the last decade with the help of popular TV shows, stories online, and the promising idea of getting quick returns. But the key difference between successful flippers and others is having a sound financial plan and not great salesmanship or the right property. The strategy depends on one basic element for most experienced house flippers: the hard money loan.
Hard money loans are more than just a financing alternative – they’re usually necessary to make house flipping a reality. For newbies in real estate investment or for those who are interested in growing their flip game by leaps and bounds, understanding the importance of hard money loans could be the edge between standing still and moving forward.
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Speed Matters in House Flipping
Probably the biggest challenge in house flipping is holding on to good deals. Real estate opportunities tend to vanish quicker than signing a deal. House-flipping success is usually all about speed and efficiency. The ordinary financing course, for example, bank loans or mortgages, may require a lot of paperwork, a tedious approval process, and delays associated with underwriting. The most sought-after opportunities usually slip away when conventional loans become available.
In comparison, hard money loans are usually processed and closed within days. These financing sources do not care about creditworthiness or salary but property value and your flip project. For flippers, this is crucial. By focusing, you can target properties that other people may miss for the sake of speed while keeping up with the fast-paced market by being relevant.
No Traditional Lenders Fund Distressed Properties
Many homes that would be good to flip need work, and sometimes a lot of it. Most of the time, these run-down homes can’t get normal loans because they don’t meet basic standards for being habitable. Traditional lenders may not want to give money if the paint is peeling, the plumbing is broken, the electrical systems are old, or the appliances are missing.
Hard money lenders only work with these kinds of homes. They are more interested in how much the house will be worth after the renovations are done than in how it looks now. Because of this, hard money loans are the best way to finance homes that banks wouldn’t touch.
If you’re flipping houses, you probably don’t buy ones that are ready to move into. That means you need a lender who knows how much potential is worth, not just how much something is worth now. Discover more here https://www.scotsmanguide.com/residential/hard-money-should-be-on-every-brokers-adar/.
Short-Term Projects Call for Short-Term Financing
When you buy a house and then sell it, it usually takes a few months. With this short time frame, you don’t need a 15- or 30-year mortgage. You just need project-specific financing. This is how hard money loans are set up, so they are only good for a short time. Most of them have terms between six and eighteen months, which is enough time to fix up the house and sell it without being stuck with a long-term debt.
For flippers, this structure is great because it lets you keep going. You can pay back the loan and use the money you made from the first flip to start the next one. For a short-term investment, you’re not obligated to pay money for a long time.
Flexibility to Change Terms
Hard money lenders can offer open loan terms, while traditional lenders have to follow strict rules. Some examples of this are down payments that can be changed, payments that only cover the interest while the house is being fixed up, or loans that cover both the purchase price and the cost of the repairs.
This freedom changes everything for people who sell houses. You can set up the loan in a way that works for your project, schedule, and cash flow. Need money for fixes that came up out of the blue? Some lenders will work with you to change the terms or give you more draws. This kind of flexibility can really help when there are a lot of moving parts to a renovation job. Read more here.
Cash-Free Leverage
Flippers who are good at what they do often work on more than one job at the same time, which means they need to be able to get money without using their own money. Because hard money loans let you borrow money, you can do more things at once.
You could use a hard money loan to pay for 80% of the purchase of a property instead of putting $200,000 into it all at once. This would let you spread your money over two or three projects. For your flipping business to grow faster, you need to make better use of your money. Using hard money doesn’t just protect your cash; it also makes it easier for you to grow.