Business Loan for House Flipping California

Looking at Starting A House Flipping Business? Go for Hard Money Loan!

House flipping has become a lucrative business due to the rise in property prices since the Great Recession of 2008. It is pretty straight forward actually. You buy an old house, renovate it and sale it at an elevated price. Sounds good, right? But, you do need the capital money to get started here!

You need money to purchase the property, to fix it, to pay taxes, to pay insurance and so on.

So, unless and until, you do have a considerable sum to invest in, it is tough to start your house flipping business. Well, you could get a loan to get started. But, after the crash of the housing market in the country, the market has just started to stabilize and there’s still high doubt among the money lenders about the success of house flipping. They see it as a risky proposition.

The problem is even worse for a fresher or an inexperienced flipper. On one hand, you are just starting out; so chances are you are pressed for funding. One the other hand, you hardly have any filliping experience to show in your portfolio to get approval for a business loan.

Don’t be heart broken. Apply for hard money loan instead!

What is Hard Money Loan

Hard money loans are typically issued by financial institutes, such as banks, private investors and companies. These loans have terms generally less than a year or two with interest rates varying from 12% to 18% in addition with 2 to 5 points i.e. 2% to 3% of the loan amount.

Let’s understand this-

If your loan amount is $100,000 and you were charged 3 points, you need to pay 3% of $100,000.

Two Big Advantages:

Here comes the big news for you. Unlike the conventional mortgage system, you don’t need to pay points to the hard money lenders until you resell the home. Basically, you are not putting up your own money in the process.
You can borrow hard money loans based on the property’s after renovation value (ARV). You will get maximum 70% of the ARV. Suppose, your home costs $100,000 and its ARV is $200,000, your maximum loan amount will be of $140,000. So, pay your purchase price of $100,000, pay all your closing costs, fees of the lender, carrying costs and other selling expenses. You are still not putting up money from your own pocket.

How is Hard Money Loan Different from Conventional Loan?

In case of hard money loan, you get rid of bureaucratic red tapes. It means faster disbursement of loan amount for a flip.
In case of properties in poor condition, you will hardly get a loan through conventional mortgaging system. Hard money lenders are relatively less stringent about property condition or borrower’s qualification like credit scores. But they may opt to see your bank statement or tax returns to ensure your credibility. However, it varies from one lender to another.
Your traditional money lender will see if you have borrowed the down-payment too. On the other hand, hard money lenders do not care about such.

Where to Apply

Flippers, especially aspiring ones often harbor a question, “How Do I Apply for a Hard Money Loan?”

Well, you can go to traditional financial institutions such as banks or can apply online. Once you are determined to avail a hard money loan for your flipping business, you have got two options to choose either.

#1. Traditional Banks:

When you hear about banks, you imagine a sack-full of documents and applications waiting for approval. Before opting for hard money loan from banks, note that banks consider flipping as a risky proposition. You have to dig harder to bring out the treasure.

Pros

Banks provide loans at relatively lower rate of interest.

Cons

Document verification process is quite lengthy.
Banks follow strict guidelines to check the eligibility of the borrowers. Having a great credit score is a must in most cases.
Property qualification criteria are stringent with most traditional lender. Applications for properties in poor condition are often rejected.

#2. Online Lenders:

Who are they?

They are online facilitators who have a good network of money lenders such as banks, private lenders and peer to peer lenders. Today, there are a number of such lenders operating in the market.

Let’s find out their pros and cons: