A hard money loan is a staple in the home flipping community. Sadly, many investors fail to understand the value of this financial instrument and remain out of the real estate market as a result. Property has underpinned the value of high net worth investors’ portfolios for many generations, and the hard money loan is a fantastic means of creating additional purchasing power for new real estate investments.
Whether your strategy includes adding smart devices in an investment property, such as the My Cloud Home device, or fast funding to add repairs to the roof or kitchens, a hard money lender is typically a lucrative option for real estate investors. Used responsibly, this type of loan can act as a unique wealth generator for your long-term investment goals.
What is a hard money loan?
It might be helpful to begin with the basics when it comes to this type of investment loan.
Real estate investors often rely on flip loans in their local area rather than the traditional mortgage loan that many homeowners choose to help them finance their purchase. This is because a flip loan is a faster funding option for purchasers looking to move quickly on an investment property. However, lenders who extend these types of loans are often private equity firms or even individuals rather than traditional financial institutions that you may already be familiar with (like Bank of America or Chase, for instance). Searching for “fix and flip loan in Oregon” (or in your particular locality if you aren’t a real estate investor based in Bend, Eugene, or Portland) can help you with the finances that it takes to back a home flipping project.
Hard money loans are those backed by tangible assets rather than a credit score. This gives lenders greater speed when it comes to approval, but it puts borrowers in a somewhat more precarious position in considering the repayment obligation.
A hard money loan uses an appraisal of your residence or other collateral asset holdings (such as a large reserve of gold or silver bullion, collectibles, or artwork) in order to guarantee the loan amount. If you don’t pay back the borrowed capital, the lender can seize the collateral assets used to fund the loan.
This means that a real estate investor is putting their own home or pool of assets on the line in order to fund an investment opportunity. The consequences of non-payment can be devastating. Still, the benefits of a flip loan are monumental. Used intelligently, hard money borrowing taken out to make a real estate purchase can generate tens of thousands of dollars in a quick profit.
The benefits are numerous, but they begin with speed.
The speed element of a hard money lending opportunity is one of the primary draws for real estate investors. The ability to fund a purchase in days rather than weeks gives the investor access to the most important resource in the real estate trade, and that’s time.
Real estate traders, and particularly flippers, must capitalize on this element of the investment process. In the stock market, gold trade, and property market, time is the primary driver of profit. When it comes to rental income generation, dividend aristocrat investing, or long-term asset holdings, dividend yield increases as the ownership timeline elongates. This is because the underlying value of all these long hold assets increases over time as a general rule-of-thumb. Each of these markets sees dips, but inflation will ultimately drive prices north with enough time. This means that your equity rises and dividend payouts increase in relation to the initial purchase price as ownership continues.
In the flipping market, the inverse is true. The faster you can resell a property the more profit you can expect to lock-in. This is because monthly repayments continue to cut into your bottom line for each additional month that you own the asset. A sale gives you the cash to pay off the loan and take the profits, so a fast movement on any property cuts down on the length of time that your interest rate will add additional debt onto the loan amount.
These loans provide the right level of additional funding for upgrades.
Flippers typically have to make renovations or structural changes to a home in order to boost the ultimate sale price, so working with hard money lenders that can fund a project with little lag time and contractors like Direct AC that make fast service calls can give you that leg up when it comes to relisting a property in record time. A contractor like this, with years of experience in the air conditioning repair industry, is an invaluable asset to flip investors when it comes to fixing and flipping homes.
The air conditioning unit is often a point of contention for home buyers. A replacement can be costly, so preemptively solving the problem can help you to list a more attractive property while also boosting the price with a new amenity already built into the home.
Hard money loans are a wonderful tool for investors in the property market. Make sure you do your due diligence before finalizing a loan, using the right product can lock in a huge increase to your bottom line.