As we continue to recover from the 2008-2009 economic crash, one of the most popular forms of investment today continues to be in real estate. Buying up older, unattractive homes, renovating, and then selling them at a higher value is called “flipping” and is one of the best ways to make a decent profit.
The problem is, finding short-term funding for those hoping to make their first investment in the fix and flip game can be difficult. Without extra capital at hand, it can be nearly impossible to buy and renovate a home, especially when the process often takes longer and costs more than is ever anticipated.
Whether you’re new to the flipping game or you’re a grizzled veteran, hard money loans are the best way to fund a project. Also called ‘private money loans’, this type of capital isn’t acquired through the bank system, but rather though a private investor more willing to take the risk at the expense of higher rates.
Why Hard Money Loans Work for Investors
Getting a home loan isn’t easy. Not only does the bank make the buyer jump through a lot of hoops, it can take many months to get the money. But, if you’re buying a home, you’re not looking to move in and spend the next 30-years paying it off. Instead, you need the money ASAP to get on with the renovations and have it sold within a year.
Because it’s easier to get a hard money loan and the qualification requirements are lower, that takes the burden off new investors looking to jump into flipping. In fact, most flippers get their hard money loans within 15 days, not several months. This means you can be ready to start renovating within two weeks.
The Right Investor
If you’ve ever seen the show Shark Tank, you’ll sort of get the idea behind the motive of a lot of these investors. The number one thing they always want to know is what the value is of what they’re investing in. What will they get out of it? The same is true with hard money loans. The investment is in the potential value of the home and property AFTER it has been flipped.
This is what makes it easier to get a hard money loan. It’s not about the borrower’s financial status, but what they feel the value of the updated home will be. This also means that the borrow doesn’t have to worry much about the added interest to the loan. Once they finish the renovation and sell the home in that year, they can pay it back fairly quickly.
That means it’s not the interest the lender hopes to make money on, but the project itself. The high interest rates only make up for the added risk the investor is making. Once the home sells and a better track record is initiated, then the buyer can most likely obtain better hard money deals. Either way, it’s still the simplest way to gain capital for your investment.