3 Reasons to Use Private Funding for Your Next Fix-and-Flip Project
Private lending has become the funding standard for fix-and-flip projects since tighter credit standards were established after the 2008 – 2009 financial crisis. Why is private funding so vital for house flippers and why should you consider this type of loan for your next project?
What is private money lending?
Private money lending is an alternative to financing through a traditional bank, and it involves private individuals or businesses loaning their own money for investment purposes.
The terms of the loan are determined by the lender and the borrower. The investment is secured by the lender — through a mortgage and note or other means — in exchange for a return on investment, an equity split, or some combination of both. If the property in question is being used for investment, then the terms don’t need to adhere to the Dodd-Frank Act and the private lender can set the agreed-upon interest rate. This interest rate is generally higher than traditional mortgage rates.
How can a fix-and-flip be financed?
Flipping a house can extremely lucrative but the process requires more funds than simply buying a house as a homeowner. For starters, a flipper needs money to not only purchase the house, but to cover taxes, utilities, insurance, and, of course the renovations as well. This capital has to be available as soon as the sale closes and last until the property sells. Plus, short-term capital gains (which can have a high tax rate depending on your tax bracket) need to be paid on a property that’s flipped within one year.
Without a stable source of cash, it can be difficult to get a fix-and-flip project off the ground. Though it used to be easy to secure a loan (pre-recession), working with a traditional loan institution is an arduous process these days. If you’re lucky enough to quality for a loan with a down payment, you may still pay more than you would if you were borrowing to buy a primary residence. Most lenders believe fix-and-flip projects are risky and because of that the terms aren’t typically in the borrower’s favor. In fact, many institutions won’t lend to first-time or inexperienced flippers (and if you can find one who will, you’ll be charged much higher interest and fees). The question becomes: without a long, successful track record, how can a flipper get financing?
Why you should use private funding for your fix-and-flip project
Don’t get left out of the house flipping game! Housing fix-and-flip projects are at their highest levels since before the recession thanks to a combination of low housing supply, rising home prices, and better financing options. These factors are providing flippers with great profits.
By using private funding, you’ll:
- Avoid the post-recession standards that traditional banks and lenders have implemented. If you don’t have the assets or the credit that these lenders now require, you don’t need to lose out on a lucrative real estate deal. Don’t get shut out by conventional lenders — you’ll benefit from more flexible financing options, even if you have less-than-ideal qualifications.
- Invest in properties that don’t normally fit into traditional financing guidelines, like homes in poor condition. Private lenders make their choices by evaluating the purchase and repair cost against the resale value – not just a house’s overall value.
- Move fast! The ability to get financed fast is a real factor when it comes to winning a bid for a property. Speed matters because a fast close is enticing to sellers and can set an offer apart. Private funding is often completed within a week, if not much sooner. When compared to the process of convention funding, which can take 45 days, there’s no doubt that private funding is a great choice.
Your success is our success
Private lenders have a stake in your success! That’s why trustworthy lenders, like AIC, seek out projects where we can truly be partners. We take the whole picture into account. While we will look at credit scores, we also take a variety of other factors under consideration. These may include your overall experience in real estate, your experience in the specific type of deal you’re proposing, what your success has been, and the strength of your deal.