When it comes to financing a real estate fix and flip project, there are different methods to obtaining capital.
Hard Money Loan
Hard money loans are those issued by private investors rather than traditional commercial banks. Hard money loans are often a popular option for real estate investors because it allows the investor to close quickly and easily calculate the cost of capital for their project. Hard money loans can close within 7 days. Providing the investor an advantage to make a stronger (close like cash) offer to the seller.
Traditional financing can take 45-60 days to fund. Traditional lenders typically utilize cash flow to underwrite and approve or deny the loan. Hard money lenders focus on the subject property and/or additional assets to quickly approve or deny the loan within hours vs days or weeks for a traditional lender.
The loan term ranges from six months to a year long but can extend as long as five or more years. Interest rates for a hard money loan are typically slightly higher, interest only, and around 8-15%.
Fix and Flip Investors understand that hard money is quick and allows them to take control of the asset. They can easily calculate the cost of capital to forecast their return on investment. Allowing investors to acquire, rehab, and quickly sell or refinance.
Traditional Bank Funding
Banks often have clear predetermined standards for their lending capabilities. They must live within the set parameters of minimum credit scores, maximum loan amounts, or sufficient credit history. Each of these requirements typically varies from bank to bank.
When it comes to funding a fix and flip project, investors tend to use this method less frequently because of slower approval processes and often decreased likelihood of being approved.
Banks may be less likely to offer funding for a fix and flip project without clear proof of the predicted revenue from the completed project. Before pursuing a fix and flip loan, it’s best to ensure that you have a well planned budget and are able to predict the expected selling price of your property following the renovation.
Cash-out Refinance
If the commercial property you acquired has increased in value from when you purchased it, this may be a well suited option to fund your fix and flip project. A cash-out refinance allows you to utilize the equity acquired from a real estate property by refinancing your mortgage.
In a cash-out refinance scenario, a borrower refinances their mortgage and cashes out the remaining amount for immediate use. For example, let’s say you purchased a property for $1 million and paid a 20% deposit at the time of purchase. It’s 5 years later and you’ve paid off a total of $50K of your house plus interest. You have $50K remaining to pay. A cash-out refinance would involve getting a new loan for $100K, using $50K to pay off the remainder of the house, and the other $50K to invest in your fix and flip project.
Home Equity Line of Credit
A line of credit funding acts like a credit card, but for a specific project approved by a lender. There is a set amount of money you’re allocated to borrow, similar to a credit limit. For home equity projects, the credit limit is much higher than a typical credit card.
If you have a $100,000 credit limit and take out $35,000 for a renovation, you can pay back the amount borrowed over time plus interest. This scenario still leaves the borrower with $65,000 of credit still available for use. As the amount borrowed is paid back over time with interest, the amount of credit you have will climb back to $100,000.
Crowdfunding
Crowdfunding loans do not come from just one lender. Also known as “peer-to-peer” lending, crowdfunding involves raising money through multiple investors. While this is a less traditional financing option, it may serve as a great resource if you can tap into your network of family, friends, or internet sites that help borrowers fund innovative projects.
At Innovative Capital Corporation, we partner with commercial banks and private lenders to match borrowers’ unique needs with the right lending solutions to fulfill them. When you partner with us, we collect information on your unique needs based on the provided information. We match borrowers with the right lender and vice versa. Our process appeals to both borrowers and lenders in that borrowers find their ideal loan offering, and lenders are well matched with deals within their scope. Additionally, we understand the unique challenges of fixing and flipping real estate as we have completed many rehab projects ourselves. Having our team in your corner provides additional insight to help make sure your fix and flip project is a success. For more details or to get started, contact our team today.