Top 6 Loan Types to Finance Your Fix and Flip

If you are doing fix and flip projects, then you know that it is critical to have money ready to go when the next great deal pops up. So, what are the best fix and flip loan options for investors?

There are several commonly used options and a few unconventional ones you can tap into. The most savvy investors will have a couple of different options lined up so that they can act quickly to win the deal.

Here is a rundown of available options, including which are best for certain types of investors and the perks associated with each.

Hard Money or Private Money Loans

What it is: Private money loans, also known as rehab loans, bridge loans, or hard money loans, are a type of fi­nancing provided to real estate investors (borrowers) by private lenders for the purchase of properties. The borrower’s objective is usually to fix and flip the property.

Best for: Experienced investors who have a track record of success flipping houses. Lenders want to know that the borrower has the knowledge and expertise to complete the project in a profitable way.

Perks:

• Quicker access to cash. Traditional bank loans usually take 30+ days to complete. For most real estate investors, this means lost opportunity. Waiting 30 days for money allows competitors with cash to swoop in and “steal” deals
• Income evaluation.Proof of income is a requirement for traditional lenders. For many real estate investors (particularly those who are self-employed or commission-based), this requirement often disqualifi­es them for bank loans. Private money lenders focus on the property value since the loan is secured by the property. This simplifi­es the requirement.
• Project value vs. property value.A common measurement tool for banks and private lenders is loan to value (LTV) ratio. The question is which “value” is it referencing? The value of the property now or the value of the property once it is rehabbed? It can be difficult to get traditional lenders to take the after rehab value into account, which may limit the loan size. However, private lenders are often much more willing to provide a loan based on the anticipated final value.
• Condition of the property.Many traditional lenders (FHA) require the property to be in move-in ready condition. Since ­fix and flips typically require extensive remodels, this requirement is difficult to meet. Hard money lenders understand the nature of the project and that move-in ready will be the result after improvements are made.
• Credit score.A strong credit score is required by all traditional institutes for any loan consideration. Private money lenders look at credit score as one of many factors but are most interested in the property value.

Loans From Friends and Family

Mixing business and pleasure can be dicey, but let’s face it—when you are just starting out, this may be your only real option. If you do seek funding from friends and family, treat it like any other business transaction. Put everything in writing, and make sure expectations and potential risks are well documented and communicated.

What it is: A personal loan with terms and conditions established by the lender and borrower.

Best for: Your first fix and flip project.

Perks: Provides access to funding when you don’t have a track record or the cash to do a deal on your own.

Cash Out Refinance Loans

What it is: Refinance an existing property to get the cash needed to purchase a new investment property. The new loan is considered a first lien. This means you must pay off any existing liens, such as the original mortgage, before you can take the cash out.

Best for: Investors who have been in the game for a while and have at least one property with equity built up. Typically, you’ll need 30 percent to 40 percent equity.

Perks: Access to cash when you don’t have a track record or rich uncle.

Home Equity Lines of Credit (HELOC)

What it is: A line of credit based on the value of the investor’s existing owner-occupied home.

Best for: Fix and flip investors who own their primary residence and have accumulated equity of at least 30 percent to 40 percent.

Perks: You don’t need to have a specific project identified. The cash is sitting there ready to go when you need it.

Investment Property Lines of Credit (LOC)

What it is: A line of credit on an investment property, typically on long-term rentals.

Best for: Seasoned investors who have accumulated equity in rental property. Typically you’ll need 30 percent to 40 percent equity in a property to get approved for the LOC.

Perks: A way to get funds when you don’t own your primary residence and/or when you are equity rich but cash poor.

(Note: Below is a newer funding option to consider. Take a big picture, out-of-the-box view when thinking about this option. It can be used to raise the funds to purchase a fix and flip property, but it can also provide access to funding to help you get in the game and complete a project.)

Real Estate Crowdfunding

What it is: A new way for investors to raise money. Through crowdfunding, investors can either fund their deals or invest in others’ projects.

Best for: Investors who don’t have the funds to do a project on their own. Also appropriate for those who don’t want to be hands-on.

Perks: Expands the reach and network of individual investors. Opens up real estate investing to a much broader range of individuals, as some platforms have minimum investments as low as $5.

Conclusion

There are many loan options available to fix and flip investors. Not all are good for all investors—pick and choose those that best fit your circumstances and can help you achieve your goals. Just as it is always good practice to spread your risk, it is also wise to diversify your funding options.

Which types of funding have you explored? Which do you prefer? Why?

See original at: https://www.biggerpockets.com/blog/flipping-houses-best-loans