Flipping a house requires money – lots of money. Beyond the purchase price, single-family investors must come out of pocket for legal fees, appraisal fees, title costs, closing costs, home inspections, rehab costs and disposition costs. In a Seller’s market, these costs have a tendency to go the way of home appreciation…up, up, up and away. Given the median purchase price for existing homes in June 2020 of $295,300, these numbers add up fast especially when you are doing more than one flip investment at a time.
Whether you are flipping one, two, or dozens of houses per year: maintaining adequate cash reserves is critical to keeping your operation up-and-running, so that you can realize the back end profits associated with your investment. As they say…cash is king!
That is why so many single-family investors look for a financing partner to fund their fix-and-flip investment properties. Having more cash on hand gives you, the investor, flexibility in a dynamic market whether that means more cash to realize an unexpected opportunity, more cash to negotiate a better deal with a faster close or more cash to give you peace of mind through the investment cycle. Knowing which available financing options will give you the most flexibility as an investor is the key.
See all your funding options at once.
#1. Private Investors: No leverage, all equity.
If you have friends, family, or colleagues that want to get in on your investment, all you need are these three items to solidify your private investor loan:
- A promissory note delineating the terms both parties agree to follow.
- A deed of trust connecting the private investor’s 1st lien position in the investment property.
- Hazard insurance to protect the collateral held by the private investor and you.
You usually pay a private investor back in one of two ways: either with a monthly installment or in one lump sum that includes interest after selling the house. Either way, the interest rate provided by a private investor loan is typically higher than a conventional bank loan and can often be higher than a hard money or private lender loan while including a share of the back end profits.
#2. Conventional Bank Loan: Some leverage, some equity
Banks are often reticent to provide funding for flips without belt and suspender covenants, since the risk of failure to pay is higher than that of a home you intend to live in. If you succeed in getting a conventional loan, the application process can be onerous because of the extensive due diligence requirements, regulatory check-offs and rigorous credit sign-offs required by most banks. The bank might also require proof that you have successfully flipped several homes in the past.
If you are approved, most conventional loans will require the borrower to put at least 20% down (maybe more) to purchase the house and at least 20% down (maybe more) for the repair budget on the house. That’s a considerable amount of money down on one house - and it adds up with each additional fix-and-flip property you take on.
#3. Hard Money Loan: More leverage, less equity
Traditionally, “hard money” loans are easier to get because they are provided by private lenders who a.) specialize in the fix-and-flip real estate investment market; and b.) look more to the strength of the single-family asset than the strength of the borrower’s balance sheet.
So how does a hard money loan differ in structure to the other loan types discussed above? Typically, hard money loans fall somewhere in between the terms offered by private investors and those offered by traditional banks. Most hard money lenders in American charge an interest rate anywhere from 12% to 14% and origination fees anywhere from 2 points to 4 points on the loan commitment. Most banks in American charge 5% with 1 point and most private investor loans charge an agreed upon interest rate plus a share of the profits – say 35% to 50% of the profits!
Where hard money lenders earn their stripes is in the stated rate and speed to close. The average hard money lender can provide funding for the single-family investor in 10 to 14 business days without an egregious share of the back end profits – and in this business, time is money.
It's important to note that not all hard money lenders are created equal. While most hard lenders provide an 85% to 90% advance rate on total cost, Residential Capital Partners separates itself from the competition by providing a 100% advance rate up to 70% of ARV. Couple the advance rate with a 10% interest rate and a 3-point origination fee and you begin to understand why so many single-family investors have chosen ResCap as their provider of choice. Being able to close on an investment property with no money down allows single-family investors to maintain healthy cash reserves during the investment period to maintain peace of mind and preserve entrepreneurial flexibility when opportunity knocks!
See all your funding options at once.
Which loan is best for your needs? Check out our handy real estate investment loan comparison chart to weigh the pros and cons of your funding options.