Over the past decade or so, the concept of flipping houses has taken hold. Perhaps due to the number of cable TV shows where a couple finds a certain “diamond in the rough,” fixes it up then sells it for a tidy profit- all in the course of a 30 minute episode. It all looks so easy but for some reason you never get to see the projects that don’t turn out as hoped. Truth is, there’s a lot more to buying and fixing up real estate than simply a “buy low, sell for more” strategy. There’s also the consideration of whether to keep the property for the long term as a cash-flowing rental or flip the project for a profit. Is it relates to hard money lending, we play a key role.
A hard money loan is used to acquire and repair a property that doesn’t quite meet the standards of a conventional loan. Hard money loans do carry higher rates compared to a conventional one yet the utility of a hard money loan isn’t the rate as much as the overall profit potential. Hard money loans are short term in nature with the primary purpose of acquiring the property, not so much as the terms of a hard money note. Yes, you want a competitive hard money loan and you want the best deal you can but remember the most important thing during the acquisition stage is acquiring the funds needed to buy and finance the property.
If you intend to flip the property, the funds from the sale of the newly renovated home should be enough to pay off the hard money loan including selling costs. The remainder is your profit. If there are sufficient net proceeds after the sale to warrant the purchase, a hard money loan will get you to that point. When you list the home for sale the property needs to be in good condition where a traditional mortgage can be used.
If you intend to keep the property for the long term, the hard money loan will acquire and renovate the property and instead of selling the unit to pay off the hard money loan you will obtain a standard conventional mortgage and finance the property over 10, 15 or even 30 years. Remember, a hard money loan is a stepping stone to get you where you ultimately want to be.