Do you have a strong desire to get into the fix and flip business but are afraid your credit history will keep you from getting a loan? Have you already been turned down by your bank? Discouraged by a mortgage broker?
Or maybe you’ve just seen a house, sitting abandoned down the street. You know you could fix it up and turn a profit re-selling it. You just don’t have the cash and don’t know where to turn.
Or you’re just afraid of the hassle of all the paperwork you remember going through when you bought your own home and fear that’s what it would be like if you tried to get started as a fix-and-flipper.
Would you start your new fix-and-flip business if you knew how simple it would be to get financing to start? Here’s a quick primer on getting your investment property approved by a private money lender.
The first thing you need to understand about private lenders is they base their loans on the property, not the person asking for the loan. Of course, they are going to need some personal information to know who you are, but they don’t really care about your personal or credit history.
Private money lenders are banking on making their money off your ability to turn a profit on your flipped property. That means the important information you must provide to them is how much you are paying for the property and how much you can sell the property for once it’s been rehabbed.
They won’t just take your word for it. They will need to do the same homework you did in deciding to buy the property. They will want to see the comps, see the neighborhood, see the house. They have experts that will do that and determine if your numbers are reasonable.
Show Me the Money
They also will need to know that you can put up your share of the risk. Private money lenders aren’t willing to foot the entire bill for your prospective flip. You generally need to provide at least 20 percent of the purchase price. Some private lenders might ask for you to cover a higher percentage, then back off on that as they develop a long-term business relationship with you.
You also can find private money lenders to help with the construction cost, but again they won’t assume the total risk. They generally like to keep their total investment in the 65 percent to 70 percent of your expected sale price.
They also generally require a guarantee that they will be repaid. This can be a friend, co-worker, parent, etc.; anyone basically except your spouse, since that money would be coming from the same pool as yours. Private lenders also normally hold the first lien against the property, meaning if you default the judge will rule they get paid first.
Quick Loan Approval
All of this simple paperwork means private lenders can get you the money fast — typically within 24 hours. That’s important when you’re working on a fix and flip deal because you can sway the buyer with that offer of quick cash, rather than waiting a month or two or more for a normal mortgage to process and close. This often helps you come in a little lower with your offer, meaning more profit at the end.
How Do I Pay Them Back?
Private money lenders expect a quick turnaround on their investment. You normally will need to pay your interest charges as you work on the house (think a small monthly payment), then pay off your principal when you sell the house. You also might need to put up a couple of months’ interest payment up front, which will come off your final payment.
See, it’s not too intimidating to get started in the fix and flip business. Contact us if you’d like more advice on getting started or to find out if you can get the process under way before you find your first flip.
?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.