Hard Money Facts

The purpose of flipping houses — or any property — is to realize a profit. Period. From the minute you secure a property with a hard money loan, your focus is turning your property into a tidy profit that you can take to the bank.

Novice flippers normally have their eyes on this prize. They have worked hard to find the right property. They’ve successfully rehabbed and sold a property or two. They’ve developed relationships in the business from sound contractors to hard money lenders, both of whom can move swiftly at their direction to help them realize their goal – profits and more of them.

But once a novice flipper begins moving up the scale of their craft, their eyes naturally drift to more sophisticated ways to realize and protect their profits as they wield their trade. One of these handy tools of sophistication is the 1031 Exchange.

What Is a Section 1031 Exchange?

Section 1031 is an IRS code that allows you to defer paying capital gains on an investment property if you do a “like-kind” exchange of one property for another.

For example, let’s say you buy a property for $100,000, improve it, and the value rises to $200,000. If you simply sell, you’ll be taxed on your gain at your ordinary income level. But if you trade the property for another property of like value, you can defer your taxes until you sell the exchanged property.

The Rehab to Rental Strategy

The novice turned proficient or expert rehab professional can take the opportunity to turn the 1031 Exchange example above into a powerful wealth building strategy. Upon selling the improved property for $200,000, the rehab professional will immediately begin looking for a property of like-kind or similar value to trade into in order to avoid paying ordinary income tax rates on the gain from sale.

When you take out a hard money loan, bridge loan or investment property loan to buy a flip, you do it with one goal in mind: to make a profit.

In the process of your rehab, many factors will conspire to eat into your profits. Weather. Time. Unreliable vendors. The list goes on. But, few things eat away as much of your profits as taxes; the more you make, the more you pay.

One of the most effective ways to protect  your profit margin is to find legal ways to minimize your taxes. We’ve identified five proven ways to minimize your tax exposure – so you can keep more of the money that you’ve worked so hard for.

1. Maximize Your Deductions

You’re not alone. Nearly one year ago, lenders across the United States froze their fix-and-flip lending programs in response to the COVID-19 pandemic. Today, the market is strong and a resurgence of programs abounds—with one pesky problem: they’re nearly all the same.

Susan Andress is the Business Development Director for Residential Capital Partners’ Correspondent Lending Program. In this role, she’s heard the stories of many lenders facing this conundrum first-hand and helped them make their programs more competitive by using Residential Capital Partners’ platform.

Download the Fix & Flip Correspondent Lending Program Highlights to learn more about our 100% fix-and-flip lending program.

Blazing fast approvals.

The market is hot. Turn-around time is critical. Andress says, “The greatest value I can offer my correspondent is responsiveness and speed in underwriting and closing. We’ve made it a very tight process. Lenders will ask me: ‘How quickly can you close?’ and, I say: ‘As soon as you provide us with a complete file!’”

Residential Capital Partners’ program has an edge thanks to their relationships across the nation. Andress reports, “We have an exhaustive list of appraisers in every market which helps the turn-time on every deal. We also have two dedicated people monitoring the underwriting and approval process.”

Residential Capital Partners has also streamlined the process by providing proof of funds letters to approved borrowers. These letters help borrowers secure a contract from weary sellers trying to pick the right buyer.

Correctly calculating ARV (After Repair Value) is no cakewalk. The market changes daily – by city, neighborhood, and street. To be a great ARV calculator, you must be equal parts historian, detective, and fortune teller. Perhaps Zen master, too, because the stakes are high: calculating ARV incorrectly can literally cost you hundreds of thousands of dollars.

ARV, by its nature, is a moving target, and most fix-and-flippers never hit a bullseye. Yet, Michael Blatney, Residential Capital Partners’ dedicated Portfolio Underwriting Manager, is one of the industry’s sharpest shooters. Why? Because he’s been flipping houses since before there was a name for it – and more or less discovered the concept of an ARV.

Make your next property walkthrough a breeze.

So, if you want to turn a profit flipping houses in 2021, when the market is tight and inventory is low, keep reading and heed his advice.

Panic is the enemy to your investment strategy. Choosing the right hard money lender might just be the antidote.

As any neuroscientist can tell you, humans make poor decisions when they panic – and property investors are no exception. Panic literally disengages our pre-frontal cortex – the area of our brains that brings logic and flexibility into decision-making. Under duress, our brains instead rely on the amygdala – the part of your brain that responds to instinct, emotion, and the impulse otherwise known as “fight or flight”. You know, the stuff any seasoned real estate investor will tell you to avoid when making an investment.

Any hard money lender worth their salt will tell you to avoid these very same impulses when a crisis hits while offering sage advice such as “your safest bet is to stay the course” or “maintain objectivity”. So why is it so many lenders haven’t taken their own advice, and either stopped giving out new loans or inflated their interest rates in response to Coronavirus?

Perhaps it’s not so easy for lenders to walk the talk without prior experience lending during a turbulent economy.

The coronavirus outbreak— and the subsequent turbulence of the stock market—has revealed stark differences between private lenders’ customer service models:

1. There are hard money lenders that rely on Wall Street to buy loans they have placed on a warehouse line. They treat loans as transactions.
2. And, there are lenders that have used their own balance sheet to fund loans. They treat loans as relationships.

Did your lender back out of your loan? Are you struggling to get them on the phone? Or get a straight answer to questions when you do? This is a sign your lender uses a transactional business model. This is also a sign that now is the time to find a hard money lender with a relationship business model.

“A lot of our competitors have said they’re relationship partners, and coronavirus was the end of that relationship.”

COVID-19 Reveals the Downfall of the Transactional Business Model

Private lenders with a transactional business model will tout both their customer service and the expedience of their capital, which they may deliver when Wall Street will buy up their loans. But what happens to customer service when the expedient capital goes the way of Wall Street’s fear? It evaporates and the very nature of a “relationship” evaporates with it.

In the words of Paul Jackson, Principal of Residential Capital Partners, “A lot of our competitors have said they’re relationship partners, and coronavirus was the end of that relationship. We want to be the lending partner of choice for our customers in good times and uncertain times.”

Finding a trustworthy fix and flip lender can be the start of a beautiful, mutually beneficial business relationship.

But a misleading lender can lose you time and money. Lenders don’t like to turn away business. So, if your deal isn’t a solid, unwavering “yes,” you may hear, “I’ll see what I can do” or “we’re still working on this.” Sometimes, this templated response comes long after the initially promised deadline. Why? Often, the lender is working behind the scenes, trying to make a deal happen for you — even if it’s in the form of an exception.

Bottom line: Don’t leave your investment property loan pending on empty words. Look for a lender who will give you a quick answer and an honest assessment of your deal.

Before you sign — or pay — anything, look for these three qualities in rehab lenders.

#1. They’re Available.

Questions can arise quickly in this business, and you need answers ASAP. Getting in touch with your lender should be easy. A good lender will give you multiple points of contact, and they’ll answer your questions in a timely manner.

#2. The Terms of the Loan Are Clear.

Having clear, easy-to-understand loan terms is simply good business. A trustworthy lender will outline any fees and loan terms before you get to the closing table. Murky fix and flip loan terms can lead to unrealistic expectations of a deal. A reliable lender will willingly help you understand what you’re signing. 

For many real estate investors, rental properties deliver a dream come true: passive income. Done right, your rental property will produce mailbox money. Your tenants pay rent, you provide maintenance here and there and your property appreciates while you enjoy the financial security of a cash-flowing asset. Even more, you can have pride in knowing you put your money to work for you.

But, to do it right, you’re going to need to do your homework and watch out for common flipping mistakes so you don’t fall victim to a bad rental property investment. Here are the 4 most important things to consider when investing in rental properties:

1. Invest in Neighborhoods You Understand

Warren Buffet famously proclaimed, “I only invest in things I understand.” The same rule applies to the single-family rehab and rental business: invest in places you know and understand. You’ll be familiar with details others might overlook, such as the rumored expansion of a large corporation nearby, or the addition of an upscale grocery store around the corner. How walkable is the area? What is the school district like? Is there a college nearby?

For help on your journey from rehab to rental, download this free investment rental property neighborhood checklist

Conventional wisdom says that late spring and early summer is the best time to sell a home or an investment property, but real estate investors and hard money lenders alike know that winter poses its own special opportunities, and that the colder months can be an ideal time to make your move.

Aside from the fact that hard money loans or property investment loans are also available in winter, there are other reasons why the winter months could be prime time to finance a house flip.

1. Less Competition From Home Buyers

For most people, winter is a time for family and holidays. Their cash is likely to go to presents and travel. Any major moves, such as the purchase of a new home, are often put on hold.

Because of this, you can approach sellers in the winter months knowing that the market is slower than usual. In the US, the annualized price of the average home can fluctuate 5-7%, depending on the time of year. In active markets like Dallas, the fluctuations have been recorded as high as 12%. And, almost without exception, the point at which prices hit their lowest level occurs during winter months.

2. The Timing From “Fix to Flip” Is Perfect.

Statistically, the best time to sell a house is in May. Houses sold during the first half of May typically sell 18.5 days faster than other months and go for 5.9% more money. On a $200,000 house, that could be a cool $11,200 bump in profits.

If you purchase a property in December, you can shoot for a completion date of May to bring your renovated property to market. It’s as simple as that: Buy during the slow season, and sell during the peak season. That’s a simple yet very effective way to maximize your profits.