House flipping remains a valid way to make money in real estate even though the practice isn’t as popular today as it was in the 1990s and early 2000s. Funding new projects is often the biggest challenge. For that, house flippers typically turn to retail banks and hard money lenders.
Retail banks can facilitate house flipping by offering traditional mortgages or specialized business loans. But it is safe to say that they are not falling all over themselves to attract business from the house flipping sector. Banks would be more than happy to not lend to house flippers. That can mean hard money is the only choice for a house flipper.
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What Hard Money Actually Is
Hard money is a form of private lending that takes its name from its asset-based approach. Approval decisions ride on hard assets borrowers offer as collateral. In a house flipping situation, the house being purchased would act as collateral for the loan. A lender would have to see enough value in that property to warrant approval.
Hard money and bridge loans for real estate can be effectively utilized to fund a house flipping business. Whether or not a flipper can succeed while relying exclusively on hard money is another question. Smart house flippers do not limit themselves to just one funding option. They line up as many as they can.
Not All Lenders Are on Board
More than one house flipper has been directed toward hard money only to discover that the lender he contacted wasn’t interested. This is the chief reason for lining up multiple funding sources in support of a house flipping venture. The truth is that not all lenders are on board with the flipping concept.
Salt Lake City’s Actium Partners is one such hard money firm. Actium provides all sorts of real estate hard money loans. They will not fund house flipping ventures. They do not have anything against house flipping as a business opportunity, but they are not comfortable with the risk it represents. As such, house flipping is something they don’t get involved in.
On the other hand, there are an abundance of hard moneylenders who do nothing but house flipping deals. They have found a way to make it work with manageable risk. House flipping projects are their specialty and something they are particularly good at.
Rates and Terms Can Be Challenging
Actium Partners’ aversion to house flipping offers an important lesson about this particular form of real estate investing: house flipping is a high-risk business. And because of that, rates and terms can be challenging to the bottom line. Let us start with interest rates.
Lenders protect themselves against risk partly through their interest rates. The higher the risk, the higher the rate on a given loan. House flippers need to always be cognizant of this fact. Why? Because the combination of a high interest rate and a slower-than-expected market can turn any project into a money losing proposition.
As far as terms are concerned, hard money loans are as short as they come. Six to twelve months is about average for a flip. Flippers need to be prepared to work quickly and get their homes back on the market so that they can repay what they borrowed.
The fact that banks are wary of house flipping makes hard money a preferred financing option for flippers. But even hard money has its limits. House flippers should make a point of learning everything they can about hard money and its ability to fund their operations. Under the right circumstances, hard and money represents a great deal.
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