Over history, real estate has proven to be a very strong and reasonably stable investment. In addition to increasing in value over time, real estate usually offers opportunities for other sources of income, such as rent. Alternatively, many people purchase real estate, repair and improve the property as quickly as possible, and then resell it for a profit. Many investors find this fix-and-flip method particularly attractive, however, very few people have the cash required to purchase the properties. Luckily, there are several options for financing loans like this. Some are better than others, and all depend on the situation. Here are a few of the best options.
This is arguably the most obvious option for financing your fix-and-flip property. A mortgage company may issue you a standard loan, just like any other bank. Of course, you pay it back with interest, over time, often decades. This option is very common, but it also has numerous downsides. First of all, there is no guarantee that you will be accepted. The requirements tend to be pretty strict, and if you don't satisfy all of them, there is no flexibility. In addition, even if you are granted a loan, these types of loans tend to be for very long terms, often 20 or 30 years. You probably don't plan to take 30 years to flip your property, but many banks charge a large fee for paying off the loan early. This means that once you sell the property, you may have to decide between taking a big loss on the property, and paying off a loan for the next 29 years.
Friends and family
If you have a generous family or circle of friends, you may be able to ask them for help. This method basically bypasses the need to fulfill requirements such as a credit check, and if the people you go to are particularly generous, you may not even have to pay much or any interest. However, there are downsides to this method as well. First of all, begging people for money can be very awkward, and is often embarrassing. It can also cause problems in important relationships. Anytime there is a debt between friends or family, the relationship changes. In fact, when you borrow money from the closest people in your life, you're not only risking the property and your credit, you're risking your relationships with those people.
If you have the cash to purchase the property outright, this may not be a bad plan. This allows you to bypass credit checks and eliminates the need to pay any interest, as with the previous method. It also prevents the uncomfortable situations that arise when you borrow money from friends and family. However, there are still a few drawbacks. Obviously, if you don't have the cash it immediately becomes impossible. Even if you do have the cash to purchase the property, it will likely leave your pockets empty. This doesn't seem like such a problem until you realize how much it will cost to renovate the property. That money has to come from somewhere.
Hard money loan
A hard money loan is, in many ways, the best option for a fix-and-flip project. First of all, although there generally is some form of credit check, it is much looser than one from a mortgage company. If your credit check doesn't pass, it's not necessarily the end, because hard money lenders are generally private, which means they can be much more flexible. The term of the loan is intended to be very short, often 9 months or less, which means you won't be paying large fees to get out of a loan that didn't make sense from the beginning. One of the best things is that hard money loans often include extra cash for renovations. This means that, with the exception of the down payment, you will need little to no cash to get into the real estate fix-and-flip industry if you use a hard money loan.
Are you considering using a hard money loan for your next fix-and-flip purchase? Contact us. We can get you started in the right direction.
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