Funding Your Fix and Flip with Hard Money
Flipping houses can be very lucrative if you know how to do it right. But financing your fix-and-flip is the critical first step—you can't do it without the funds needed to purchase and rehab the property.
Real estate investors who've used hard money lending know it's a great way to make money and build wealth quickly by leveraging funds—specifically, the use of borrowed capital—to increase the potential return of an investment (ROI).
A fix-and-flip or bridge hard money loan can empower a new flipper working on one flip or bolster a seasoned rehabber working on a few simultaneously. Read on as we discuss hard money loans and why they are such an attractive option for fix-and-flip real estate investors.
Why is hard money an attractive option for your fix-and-flip project?
Leverage reliable capital
One major benefit of hard money for a fix-and-flip investor is leveraging a trusted lender's reliable capital and speed. Leveraging means using other people's money for investment. Although there is a risk to financing a purchase, you can free up your own money to purchase more properties.
Many investors turn to hard money loans for fix-and-flip investments because they minimize the amount of money a real estate investor has to sink into a property personally. You can take on projects incrementally with these strategic loans that allow you to rehab with just 10 - 30% down (depending on the lender).
Easy qualification and approval
Hard money loans are typically short-term loans used by real estate investors to fund fix and flip properties or other real estate investment deals. The property itself is used as collateral for the loan, and the quality of the real estate deal is, therefore, more important than the borrower's creditworthiness when qualifying for the loan.
Borrowers apply for hard money loans using criteria like the property's Loan To Value (LTV) ratio, After Repair Value (ARV), and other factors that show how likely the property is to earn a profit. Usually, applications are accepted or rejected quickly, and the entire process happens much faster than a traditional mortgage—typically in a matter of days or a couple of weeks.
Once you've applied for a hard money loan, the lender will check to determine if you can make the loan's monthly repayments and run a soft credit check. This process is easier with hard money loans because these lenders won't need to dig as deep into your personal financial or employment history. However, this also means that the risk is higher on these loans, so the interest rates are usually higher too.
Speed and agility
Fix and flip investors choose hard money because the market doesn't wait. When the opportunity presents itself, and you're ready to get your project into the rehab phase, a hard money loan gets you the cash straightaway, pending a fair assessment of the business deal.
In a competitive real estate market, unless you are operating with a lot of cash on hand, you need a loan that can fund as quickly as cash. Many sellers won't even look at an offer to purchase unless it's a cash offer. Because hard money fix and flip loans can fund as quickly as cash, they're great for financing your property purchases in a competitive market.
Hard money for house flipping—how it works
Getting a hard money loan is different from getting a traditional mortgage. As stated, hard money lenders don't care as much about your personal finances or credit history. Instead, they want to ensure you have a quality deal—that your property's ARV justifies your requested loan amount.
Hard money lenders take a practical approach to loan approval. They assess the proposed business deal and the project's feasibility and work with you to establish a viable exit strategy to pay off the loan before its maturity date.
The lender bases their decision to approve the loan on the property and the proposed deal, with less focus on the individual borrower. But ultimately, your terms will depend on the hard money lender you choose to work with and your unique circumstances. Here's a list of typical requirements or qualifications.
Geographic location. Most hard money lenders operate locally or only in certain regions. However, many operate nationally—Kiavi currently lends in 32 states + DC (and counting!).
Experience, or the number of homes you have flipped. Your initial rate may be on the high end when you are first starting. However, as you gain experience in the business, your lender may offer lower rates and better terms.
For example, at Kiavi, if you're a real estate investor with at least 5 exits in the past 24 months, we will take that experience into account and customize a plan for your thriving business model with lower closing fees, customized points, and even quicker closings.
Property type—single-family residence (SFR), condo, multi-family units, etc.
Intent and property documentation includes your detailed scope of work (SOW) and insurance.
To assess the property, your lender will look at the value of comparable properties in the area and their projections for growth. Following an estimate of the property's ARV, they will fund an agreed-upon percentage of that value.
To estimate that ARV, the lender will need to know what improvements you're planning. This is where your Scope of Work (SOW) comes into play. Your SOW is a document that details the work you intend to perform at the property and is typically required by most hard money lenders. It includes renovation costs, responsibilities of the parties involved, and, often, a timeline of the deliverables.
Once you provide your hard money lender with a detailed SOW, your property will be compared with other homes in the neighborhood rehabbed to a similar extent. For example, let's assume that your property doesn't have a finished basement, but you are planning to finish it per your scope of work. Your ARV will be based on the sold prices of comparable homes with finished basements. Those prices are likely to be higher than those of homes without finished basements, thus increasing your ARV and potentially qualifying you for a higher loan amount.
Where hard money loans shine for fix and flip properties is renovation financing. Many hard money lenders cover 100% of the renovation costs and release the funds in a series of draws based on a mutually agreed-upon draw schedule.
Hard money lenders typically don't disburse the entire rehab loan amount at the time of the loan closing or on the date the project starts. "Draws," or releases of portions of the loan proceeds, occur upon completion of specific milestones you've laid out in your SOW.
A "draw" is a reimbursement for a specific set of repairs or renovation work. Simply, you pay for any labor and materials up front, and the lender then reimburses you for it. After you complete each milestone (or phase of the project), the lender sends an inspector to the property to confirm that the work was completed at an acceptable quality and then releases the draw to reimburse you for the work.
The cycle then repeats—you notify the lender to inform them the second draw is complete, they send an inspector to confirm it, then release the draw to you, and so on until the renovations are complete. You should also note that most hard money lenders will only finance repairs made by licensed contractors—unless you have a proven track record with them of high-quality, on-time work.
Working with hard money lenders
You won't find hard money loan options at your local bank. Hard money lenders are generally private investors or companies specializing in lending to real estate investors. Hard money lenders aren't subject to the same regulations as traditional lenders. As a result, they're mostly free to make their own rules about what they require from their borrowers.
When looking for a hard money lender, it's important to consider it as though you are adding a new member to your real estate investing team. Like with your general contractor, property manager, or real estate agent, you want to build a relationship with your lender.
The right hard money lender will be more concerned about building that relationship with you—one that's established on the trust, industry expertise, and transparency needed from both sides for a successful deal.
Not all hard money lenders are the same so take some time to research, ask for referrals from other investors, and review rates and terms with a potential lending partner before getting started. After all, your lending partner should be a part of your team, so you want one who's invested in your success as a real estate investor.
Hard money loans can be an excellent option for financing your fix-and-flip projects. With the help of a hard money lender, you can get the funding you need to purchase a property, make the necessary repairs, and then sell it for a profit.
Are you ready to move on your next fix-and-flip deal? Kiavi provides fast and reliable fix and flip/bridge loans to purchase and rehab investment properties. Grow your business with flexible programs and expert guidance from our industry-leading team every step of the way.