You Are New to Fix-and-Flip – Should You Use Hard Money?

You are new to fix-and-flip investing. You have your eye on that first property and plan to make big money on it. But how do you fund its acquisition? One option is hard money. The big question is how it stacks up against other forms of financing.

Hard Money in a Nutshell

Hard money is not a difficult concept to understand. As Salt Lake City’s Actium Lending explains, hard money lenders are private lenders rather than banks or credit unions. They make hard money and bridge loans to real estate investors and business owners. Their form of lending is known as asset-based lending.

Asset-based lending takes its name from the fact that loan approvals are largely based on the value of the assets being acquired. An asset needs to have enough value to cover the amount being borrowed in order for a loan to be approved.

Not All Lenders Do Fix-and-Flip

While hard money is an option for funding fix-and-flip acquisitions, you should know that not all lenders do residential fix-and-flip. Actium Lending is a good example. Actium’s focus is commercial real estate in Utah, Colorado, and Idaho. They do not fund fix-and-flip projects of any sort.

This isn’t to say that no lenders do fix-and-flip. In fact, just the opposite is true. Some hard money lenders fund fix-and-flip exclusively. Others include fix-and-flip in the different types of properties they will fund.

Why It Is Worth Considering

As a new fix-and-flip investor, you could fund your first acquisition in a number of ways. You could apply for a traditional mortgage business loan. You could bootstrap the acquisition using your retirement account, credit cards, and contributions from family members and friends. You could even check out peer-to-peer financing.

You should still consider hard money lending alongside your other options. Here are some of the reasons explaining why:

• Fast Funding – Hard money lenders are known for being the fastest lenders in the industry. They can approve, underwrite, and fund in a matter of days. No traditional lender can compete on speed.
• Flexible Requirements – Private lenders are not regulated according to the same rules that apply to banks. Therefore, they can be more flexible in their lending requirements. Flexibility is necessary in the fix-and-flip game.
• Quick Turnaround – Quick turnaround is built into the fix-and-flip mentality. Hard money is the perfect fit for fix-and-flip because of its shorter terms. Investors are not saddled with multi-year mortgages. Instead, they can get in and out quickly.
• No Early Repayment Penalties – While there are exceptions to the rule, most hard money loans do not come with early repayment penalties. If an investor can flip and resell a property quickly, he can always repay the loan early without paying extra.

There are plenty of good reasons for considering hard money as a fix-and-flip financing tool. But not everything about hard money is sunshine and roses. It does have its drawbacks for fix-and-flip investing.

Reasons to Be Cautious

One of the chief reasons to be cautious about hard money for fix-and-flip investing is the higher down payment requirements. You are going to have to have more cash up front, which could ultimately limit what you can do with that first property or two.

Also note that hard money deals are usually structured as trust-deed transactions. That means if you default, it’s a lot easier for the lender to take action against you.

Fix-and-flip is still an effective strategy for making money in real estate. Fortunately, hard money offers a way to acquire new properties without the hassles that come with bank financing. It is worth considering.