You probably have experience with a home mortgage, an automobile loan, etc. so you think you have an understanding of the loan process. You’ve maybe even tried to work with your bank to acquire a loan for a fix and flip project.
But unless you’ve dealt with a private lender, you probably don’t understand the advantages of conducting your fix and flip business with a private money lender. Let’s review 5 benefits of borrowing from a private money lender:
Asset-Based Loans
Your personal financial history, in terms of credit score, is not that much of a factor in your approval for a private money loan. Private loans, instead, are mostly based upon the potential value of the property you seek to acquire.
The lender will hold a primary lien on the property, which serves as their insurance of repayment, rather than relying upon your ability to make monthly payments under a traditional mortgage.
A private lender requires you to fund a certain percentage of the purchase price of the property — normally 20 percent to 30 percent. Some private lenders also are willing to finance a portion of the rehab cost of the property. The lender’s goal remains to keep their cost below a certain percentage (say 60 or 70 percent) of the expected value of the home once the rehab is complete. All of these target numbers are designed to ensure the lender will not lose money if you default on the loan and the lender acquires the house through foreclosure.
Minimal Cost During Construction
Another advantage of an asset-based loan is that you are not expected to pay against the principal on the loan until you sell the house. A traditional lender will require monthly payments on the principal and interest beginning immediately after the loan is issued. Private lenders require only a monthly interest payment.
Speed
The primary advantage of a private money loan is that you get the money normally within 24 hours. This gives you a great advantage in purchasing property because sellers will give preference to offers, and frequently accept lower offers, when they know they will be getting cash within a couple of days, rather than waiting a month or more for closing.
This also gets you into the property and into your work more quickly so your money is not tied up in escrow. You’ll be able to get your flip done and get your profit more quickly.
Little Paperwork
Without the search of your personal credit history and all the other hoops a traditional lender will require, paperwork is limited and can be handled quickly with a private money lender.
You will be required to provide a guarantor, who agrees to pay the loan if you are unable. This cannot be your spouse but could be another relative, friend or business associate who must provide proof they can pay the loan.
Of course, the lender will need to know the purchase price of the property and the expected value after rehab. They will have a staff member or an independent contractor in your community check the house to determine your numbers are valid.
Don’t Tie Up All Your Cash
The final advantage of using a private money lender is that you can expand your business to run more than one fix and flip at a time if you have less money tied up in one house. The possibility of having three or four houses in the works at the same time for the same cash outlay can fiscally outweigh the interest you pay.
All of these benefits do come at some price as private money lenders’ loan rates can be higher than traditional sources. Some so-called “hard money” lenders do take advantage and charge extremely high interest rates. But when you find a reputable private lender who seeks a long-term relationship with your business, you’ll work with reasonable interest rates that will allow you to grow your flipping business.
If you are planning on starting a fix/flip project soon, contact us to get more details on how a private lender can help you start and grow a house flipping business.
Center Street communications are not intended to provide business, legal, tax, investment or insurance advice. No Center Street communication should be construed as a recommendation for any business or investment strategy by Center Street or any third party. You are solely responsible for determining whether any investment, investment strategy, business strategy or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your legal or tax professional regarding your specific situation.
