For a dedicated wholesaler, the goal is always to flip the properties as quickly as possible using as little of their own capital as possible. However, sometimes you will find yourself in a position where you need some real capital to get a deal done.
After you absorb this blog post you will be able to:
- Explain the difference between conventional, private, and hard money lending
- Match the funding to the deal
Maybe you want to buy and hold some properties. Maybe you know you can sell a property, but just need a couple more weeks to get it done. Whatever the reason, short term capital secured by real estate can be a confusing concept to the new real estate investor. Let me break it down for you.
Funding Options for Flipping Properties
Here are your funding options for flipping real estate deals for maximum profit :
1) Conventional Loans:
These loans are your typical bank mortgage loans. They are not very helpful today for two reasons: First, they are hard to qualify for. Second, the best REO deals are bought with cash and need a cash proof of funds when submitting the offer.
However, some investors in certain parts of the country are still using conventional loans for investment purposes. Don’t waste a lot of time here, though. You will need a credit score of at least 700 (and very likely more) to even be considered for a second home loan or investor loan. You will be asked to put down 20-30%.
Take my word for it. The banks don’t want to loan on an investment property right now. They will look for every reason not to do the deal. Though you could technically do multiple loans, the bank will find a way not to do them. In my local Florida market, they won’t finance anything less than a $50k purchase. That excludes the best properties in my market. So, conventional is not for me.
2) Hard Money Loans:
A hard money loan is basically a private loan for a short term, usually 6-12 months. Hard money loans are generally used to fund real estate deals when the objective is a quick exit. They are high interest, high penalty loans and should only be used after good research and careful consideration. In my area of Florida, a typical hard money loan may be 70-90% financing for 6 months, paying 2-3 points and 15% interest or more.
If you don’t know what you are doing and have a weak exit strategy, the payments will eat you alive. Don’t ask me how I know that! Although the terms are steep, these loans can be great assets to investors looking to flip properties quickly or investors that have a well-formed retail strategy. Sometimes these loans are also referred to as “short-term funding” or “bridge loans”.
3) Private Investors/Partners:
This source is determined by your own ability to network. I have done numerous deals with numerous partners over a variety of structures. You are only limited by your vision and commitment. If you prove that you know how to make money in real estate successfully, you will have people beating down your door wanting to partner with you. So get creative. Offer equity in the property to a partner with capital.
You supply the plan, while they supply the money. Offer a friend or family member the opportunity to lend you money at 7% while the bank will only give them 2% in a CD or money market account. There are no boundaries here. The worst anyone can say is no.
4) Hitting the Lottery Jackpot:
This includes winning the lottery, inheritance from long lost rich great uncle, becoming a major sports star. If you find yourself in any of these categories—call me!
Wholesale Flipper Assignment For Max Profits
Your Assignment: As an investor who will be selling to other investors, you will find it helpful to know what is available in terms of loans in your area. It will be more value that you can bring to your loyal buyers.
CONVENTIONAL: contact at least 3 lenders who work with investors. In my opinion, it’s always best to get referrals from other investors, but you can search the web if need be. Ask them what investors are doing with them. Type of property, area, price range, interest rates. Get specifics and take notes.
HARD MONEY LOANS: contact at least 3 hard money lenders (if possible). Find out what types of properties they generally lend on. This will be a great way for you to see what other investors are doing in your area. Find out the type of property, area, price range, etc. Get specifics and take notes.