Fix and Flip Financing
- It cost more to flip a house than purchase one as primary living unit.
- It’s more difficult to make money but it doesn’t mean you shouldn’t flip
- You can still flip houses without paying out of pocket money
- Vetting the private lenders before signing the contract
- Hard money lenders are available, and some are amazingly fast to lend money with good ROI
It costs a lot to flip a house.
While home flipping returns can be very lucrative, the initial investment can be significantly more than simply buy a house as primary living unit. You not only need money to become the owner of the property, but also need extra funding for renovation, and also to cover property tax, insurance, and utilities from the day of closing to the day you sell it. If you financed the acquisition, you’re also paying interest payment on top of it. Although the interest is tax-deductible under the Tax Cuts and Job Act, it is not a 100% deduction. Every penny you spend on interest shrinks your return on investment. Moreover, depending on your income bracket, you may have to pay an additional 10% to 37% capital gain tax if you decide to flip within one year or less.
High return on investment is a thing in the past. Last year, 2019 marked the lowest average gross ROI within the last 10 years. The average gross profit was only $62,900. That doesn’t mean the flipping business is doom. It means flippers must do extra work to minimize cost which includes interest payment on financing.
It’s risky business and lenders are more cautious:
If you start from scratch and do not have plenty of capital to invest, then house flipping is not an easy start. Today is not 2005 when zero down payment is like charity work. It’s getting harder to get a loan and even if you’re qualified for it, you will eventually pay more when you finance to flip.
Hard Money lender to the rescue:
Many people call the term Hard Money because it is much more expensive than traditional financing. However, that is not 100% true. The “hard” usually means it’s difficult for conventional lenders to finance the flipping. When traditional lenders failed to provide flippers with the much-needed capital to invest in the lucrative deal, hard money lender steps in to bridge the gap. The hard money loans are usually short term with interest rates of 12% to 18% plus 1-3 points of origination fee. If you borrow $100,000 and the lender charges 2 points, then you would pay $2,000. However, you may not have to pay the points until you sell the house.
The hard money lender usually base max financing amount based on the house’s after repaired value (ARV). For example, if a house is worth $150,000 and ARV is $350,000, you can borrow up to 65% of ARV which is $227,500. After paying the purchase price, you can use the rest of the financed money for closing cost, lender fees, renovation, carrying costs, and selling expenses. This shows that a good lender can help you flip houses without a single penny out of your pocket.
Where your credit score becomes irrelevant:
Unlike conventional lenders who must follow a long list of bureaucratic red tapes, hard money lender can lend money on houses in disrepair with bad credits. A smart hard money lender will make decision based on how lucrative the deal is. If the home flipper is a trust-worthy person and the deal is strong, hard money lender will make the loan in a heartbeat.
When the lenders evaluate the borrow, unlike conventional banks, credit score and debt-to-income ratio are out of the windows. That’s when another meaning off the “hard” comes in. Hard means collateral for the loan as hard assets. If the repair cost and the resell value make sense, the lender will lend out money because the ROI justify the risk. There is always a safety net for the lender. Should the flipper flop, the lender can always foreclose and sell the house at a profit.
There is one common thing between hard money lender and conventional lender: first position lien. Until the borrower fully repay the loan, the lender will hold a lien but the borrower is still the owner and hold the deed.
Looking for hard money lender:
Hard money lender… They are everywhere. However, good ones are hard to come by.
A simple google search will give you a long list of lenders eager to give you money for the right interest rate. However, you should look for the lender that has:
- Fast turnaround time
- Quick decision making (your deal is not going to wait forever. If you don’t get it today, some one else will.)
- Reasonable rates
- No big committee: Remember, you choose hard money lender to avoid the bureaucratic committee of the conventional bank.
- Decades of experience.
In general, you should expect:
- 1 to 3 points origination fees
- Interest rate as low as 9% up to 18%
- Term 6 months to 18 months
- Loan to Value: 65%
- Loan to Cost: up to 80%
Depending on your performance, you may get less interest rate or slightly more. For example, a flipper with 10 complete flips will often see origination fees of 2% and 9% interest rate compare to a newcomer with only 2 flips who can still get a loan at slightly higher rate of 11% and 3% origination fees.
If you’re short on cash to flip houses, financing is your friend. Remember, if you don’t catch the deal, somebody else will. Hard money lenders will likely benefit your case because they don’t have a minimum credit score. Their price reflects the nature of the high-risk business you’re in, but with hard money lender, you can get started with little or no cash to invest. This is also help you flip more houses at faster interval, which in turn increases your ROI.
Check out Coastal Capital program highlights and give us a call at (310) 280-9173. Since we are a direct lender, we have our own underwriting guidelines and standards which translates into a quick, fast and efficient process to approve your loan and get it funded fast! In loan transactions, our focus is on the current value of the property, the purpose of the loan and your ability to repay the loan. We are honest, efficient, and reliable, and our 35 years of success in this business is testament to our commitment to our clients.