Flipping houses is one of the best businesses out there. If you know what you’re doing, it’s relatively low risk. And you can make a big chunk of change fairly quickly. As far as get rich quick strategies go, it’s not that far off.
There were over 200,000 houses flipped in 2017. That’s a validated business model if I ever saw one. It’s one that makes sense to most people too.
Basically, you buy a house that needs work at a low price. Put in some elbow grease to get it up to par with the other houses in the neighborhood, and make a huge profit by selling at market rates.
The great state of Connecticut has a lot of great deals to be had. There are a lot of ugly houses in this state, and with the appreciating value of most real estate in this area, you can be sure you’ll find a buyer in no time once it’s been nicely renovated.
The other great thing about this business is that you don’t need a lot of capital to start with. In fact, you can finance the entire project without using any of your own cash.
Before I go into financing strategies for getting a fix and flip loan, let me lay out some of the costs.
You’re going to get a mortgage to buy the home. But for real estate investments like these where the house you are buying is not for a primary residence, in other words: you’re not buying it to live in yourself, they will require at a minimum 20% down, sometimes more.
That means if you’re looking at a property for $50,000, you’ll need at least $10,000 cash as a down payment. But that’s not it. You’ll need cash for other things too.
You’ll need to pay for home insurance. You’ll also need to pay any home owners association fees if there are any. You’ll also need to pay some kid to come cut the grass every now and then too.
On top of that, the next biggest cash requirement besides the down payment will be renovation costs. You’ll want to do a detailed estimate of the renovations you want to make, then add a cash buffer in case of cost overruns.
So now that you know you need some cash upfront, here are some ways to get that cash from other people.
There are a lot of rich people out there who sees the value of flipping houses as an investment, but don’t want to put in the work. And don’t be deceived, flipping houses is a ton of work.
In order to get their money, you need to do a lot of research and groundwork first. Find the house you want to flip. Get the address, information about the neighborhood and data on comparable houses in the area and what they sold for. Also get the going market rates for price per square footage.
Then analyze the renovation needs and get cost estimates from at least 3 contractors. Do an analysis on how those renovations will increase the market price of the house as well.
When you put the deal together to pitch, it may look something like this.
You find a house for $40,000 in a neighborhood that is being gentrified. That means you’ll need $8,000 to start for the down payment.
It’s in bad shape. You do the legwork and find out you’ll need at least $10,000 of work put into it to get it sell-able at market rates.
You budget in the other various costs that comes out to about $2,000. Total, you’re going to ask the investor for $20,000. As an example, you can agree to a loan at 10% interest or split the profits in half.
You find that it’s an up and coming neighborhood near the thriving downtown area and that comparable houses are going for about $120,000. Once you’re done with the renovations, you’re going to sell the house for that much.
That means after you’ve done the renovations and paid back the mortgage, you have a profit of $60,000. In the case of the 10% interest loan, you simply pay the investor back the $20,000 plus $2,000 for interest which is $22,000.
In the case of the profit sharing model, you give him half of your $60,000 profit which is #30,000.
Finance partners work in a very similar way, but they do this as a business vs. it being an individual investor. Companies like Delancey Street specialize in helping house flippers with their upfront cash needs.
The advantage to these companies is that they will have standard agreements whether it’s a loan or an investment situation where they share the risk. The other great thing about it is they are easier to find.
If you’re a real estate investor, you understand the difficulties sometimes associated with mortgage lending. It’s not always possible to get approved, even when you think your credit and income is up to par. Hard money loans are often the solution to this problem because they are an asset-based loan. In fact, some real estate investors have come to appreciate the ease and speed of hard money loans. Let’s take a closer look.
About Hard Money Loans
Whether you need a bridge loan, a fix-and-flip loan or a construction loan, there’s probably a hard money lender that can accommodate your needs. Hard money lenders are private companies and individuals who approve loans on an individual basis using criteria that’s less rigid. While traditional mortgage lenders look at credit and income as they determine your ability to repay the loan, hard money lenders are mainly focused on the value of your collateral.
If you want to buy a property now and either resell or refinance it, you can get a bridge loan. You can also use a bridge loan if you want to buy a property and get the cash down payment by selling a property that you already own. Fix-and-flip loans are for buying, fixing and reselling a property, then paying off the loan. A construction loan is for real estate developers to start a new construction project, then refinance or sell it quickly.
There is another loan option that’s far less common; the owner-occupied loan. This loan is for individuals who are unable to secure a traditional mortgage for a property where they intend to live. While there are some hard money lenders who provide loans for owner-occupied consumer loans, many do not because they can be a regulatory nightmare.
How Hard Money Loans Work
A benefit of hard money loans is that the application process is fast and loans can often be funded in less than a week. Borrowers will typically need to provide a cash down payment that’s based on the property’s Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio. The term for hard money loans is 12 months to several years. You don’t want a lengthy term because of the high interest rates.
Depending on the loan type, you may only need to make monthly interest payments instead of monthly principal and interest payments. Every lender has different criteria. There are some loans that don’t require any payments until the maturity date, at which point you will make a balloon payment. This includes paying the principal, all of the remaining interest and any fees.
Is a Hard Money Loan Right for You?
Hard money loans have a short term, high interest rates and a lot of fees. Additionally, there is little government oversight, so you have to be careful about the lender that you select. When the loan matures, there could be a problem with refinancing because of the “seasoning” period of traditional mortgage lenders.
There are a few questions that you should ask yourself when considering a hard money loan. For starters, is there a less expensive loan option? If so, then your problem is solved. You also want to know if you are in a buyer’s market because this can make selling your property difficult.
Many real estate investors decide that the quick money, relaxed requirements and flexible terms are advantageous enough to move forward with a hard money loan. Sometimes it’s just a matter of using a hard money loan as a tool when an investment opportunity arises. Every situation is different, and by weighing the pros and cons, you can decide what’s best for you from a strategic standpoint.