Business Monkey News brings together the latest news from the network related to the world of new technologies, companies, economics, and marketing, Helping you as an entrepreneur.

Why Hard Money Might Be the Best Option for House Flippers

by Byrne Anderson
0 comment

House flippers are a unique breed of property investors who make money by buying cheap houses in need of renovation, rehabbing them, and immediately putting them back on the market. Succeeding as a house flipper takes a lot of nerve. It also takes knowledge, skill, and the right funding sources.

More than one house flipper started out by bootstrapping his business. This is to say that he funded the purchase of his first property out-of-pocket. He then used the proceeds from the sale of the property to purchase the next one, and so on. Bootstrapping does work, but building a solid business that way takes a lot of time and considerable financial resources.

Another option is to go the hard money route. Hard money is a fairly popular funding solution among house flippers who know how to take maximum advantage of it.

How Hard Money Works

A hard money loan is essentially a short-term loan made by private lenders. It is so named because lenders rely on hard assets to secure loans. In the case of a house flipper, the property being purchased normally acts as collateral against the loan. Lenders would expect to see a house with excellent income and sale potential before agreeing to do a deal.

Actium Partners, a hard money lender in Utah, says that collateral is everything in the hard money business. They explain that lenders are more comfortable making loans when borrowers offer strong collateral backed by a solid executive summary and a workable exit strategy.

Hard Money is Fast Money

A big advantage of hard money for house flippers is speed. Where banks and credit unions could take weeks to approve a loan, most hard money lenders can do so in days or even hours. This benefits house flippers inasmuch as it enables them to close on new properties quickly. The sooner they close, the sooner they can get to work on rehabbing and reselling.

Preserving Cash Flow

Another big advantage of hard money is that it affords the opportunity to preserve cash flow. Whereas bootstrapping leaves house flippers in a position of always having their own capital tied up in a project, hard money lending frees up cash assets for other purposes.

Having adequate cash flow gives a house flipper more money to use toward down payments. This suggests that an investor with enough cash on hand could have multiple properties working at once. If he continued bootstrapping, he might be limited to a single property at a time.

Paying for Renovations

Hard money comes in handy for covering renovations as well. Go to a bank and you might have to obtain separate loans – one for the purchase and another for rehab. Hard money lenders rarely work that way. They combine all of the borrower’s financing needs into a single loan.

How does this help? Generally, it means being able to borrow more on a single property. Again, this assumes that the resale value of the home will exceed the total amount borrowed for both purchase and rehab. Thus, experienced house flippers know enough to be circumspect about their renovation budgets.

House flipping may have reached its peak a few years back, but it is still a very lucrative way to make money in the property market. Savvy investors who know a thing or two about renovations are still able to buy cheap houses, rehab them, and sell them for a decent profit. Many house flippers do what they do by relying on hard money as their primary funding source.

You may also like