The Pros and Cons of Relying on Hard Money to Flip Houses

The Pros and Cons of Relying on Hard Money to Flip Houses

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There is still money to be made in house flipping. Perhaps the market isn’t as lucrative today as it was in the 1990s, but there are still plenty of investors whose livelihoods revolve around buying homes, renovating them, and putting them back on the market. Some of them rely on hard money as their primary financing tool.

The Basics of Hard Money

Actium Partners is a Salt Lake City hard money lender specializing in real estate investments. They explain that hard money is a form of private lending through which financing can be obtained without having to go through banks or credit unions. Hard money lenders are not traditional financial institutions. Therefore, they are not governed by the same rules and regulations.

The Pros of Hard Money for House Flipping

A basic understanding of hard money leads us to the advantages of relying on it to finance a house flipping strategy. Here they are:

1. Fast Financing

The biggest thing hard money lenders have going for them is speed. Although Actium Partners does not finance house flipping deals, they have been known to close on loans in one business day. That is fast. The fact is that hard money lenders do not need weeks or months to do what they do. They only need a few days to appraise a property and write up the documents.

2. Immediate Funding

Once a hard money loan is approved, funding is almost immediate. Investors are not waiting two or three weeks to get to closing. Just as an example, Actium once approved a loan near the end of business on a Friday afternoon. First thing Monday morning, they sent both loan documents and funding directly to the title company for closing that day.

3. Loan Flexibility

Because hard money lenders are private lenders, they have significantly more flexibility in the underwriting process. They can work with borrowers to customize loans for specific situations. The end result is funding that meets the investor’s needs rather than forcing the investor to adapt to how the bank does things.

The Cons of Hard Money for House Flipping

While hard money is a good option for financing house flipping deals, it is not all sunshine and roses. There are some distinct disadvantages to relying exclusively on hard money:

1. Extremely Short Terms

Hard money loans are short term by nature. The average term is 6-12 months. If an investor cannot flip a house within that amount of time, he needs to come up with the money to repay the loan in some other way. Simply put, house flippers cannot afford to hold onto homes for too long if they are using hard money.

2. Higher Down Payments

Hard money lenders almost always require higher down payments compared to banks and credit unions. How high? It could be as high as 50% in some cases. If a house flipper wants to rely on hard money, he needs to have enough cash on hand to facilitate each new investment.

3. Higher Interest Rates

The interest rates on hard money loans are typically several percentage points higher than their conventional counterparts. This is primarily due to the fact that hard money loans are inherently risky. But pay off a loan quickly enough and an investor could actually pay less in total interest.

In closing, it is important to note that not all hard money lenders are willing to fund house flipping projects. But if an investor can find one that does, hard money could end up being the ideal financing option for most of his projects.

Real Estate