Smart flippers in California use hard money as a strategic leverage tool to turbo charge their flipping business.
But here’s the trick – they use it as their first option, not as some desperate last resort or ‘Hail Mary’ when their initial source of capital has a gun to their head.
Hard money is the first option for smart flippers because it is basically tailor-made for flipping projects.
It offers a suite of features that traditional lending sources simply can’t compete with.
Here’s what smart flippers understand about smart money and how you can join them.
Change your mindset
Home buyers use traditional lenders to pay off the home they live in over say 30 years.
Traditional lenders offer the most competitive interest rates.
It’s the traditional way most people think about borrowing money when purchasing a home.
But smart flippers change their mindset to look beyond the lowest interest rates and the pursuit of the cheapest capital.
They understand hard money is business capital, not consumer debt.
They demand and covet different features from their loan such as:
- fast access to capital
- streamlined approval processes that don’t rely on credit history
- customizable terms with interest-only payments
- no prepayment penalties
How hard money outperforms traditional finance
Smart flippers understand that traditional finance has its limitations in their world and that hard money outperforms it on nearly every metric.
- Connected flippers may learn about off-market or distressed deals but these deals require fast approval processes to snap up before someone else does. Only hard money can deliver this.
- California possesses one of the most competitive real estate markets in the world. When it comes to clinching a deal, speed and execution wins every time.
- Traditional lenders simply won’t approve finance on some properties for any number of reasons including their condition, zoning restrictions, occupancy or a title that is not free from liens, unreleased mortgages or is the subject of legal action.
- Flippers operate on short hold periods that more than offset the higher interest rates charged by hard money lenders. The shorter the hold period, the less interest matters relative to margin.
- Traditional lenders can kill your margin before settlement by changing terms, revaluing at the last minute or extending timelines until the seller walks.
Cost of capital vs cost of delay
The key to understanding the difference between hard money and traditional lenders is to appreciate the cost of capital vs the cost of delay.
How much do you stand to lose by not being able to close a deal as soon as it materializes?
Hard money guarantees flippers:
- faster acquisition
- better purchase prices
- shorter project timelines
- avoidance of lost deals
Crunching the numbers
Still not convinced?
Let’s take a look at a real-world example where an off-market property in slight distress has an asking price of $900,000.
The ARV is $1,250,000 with rehab costs of $120,000 leaving a gross margin before finance of $230,000.
Example A – Traditional finance
A traditional lender will only lend 75% of the purchase price (LTV).
Hence you have a $675,000 loan at 6.75% interest with origination fees of $6,500 and a 60-day close time.
Rehab costs must be funded from cash.
Here’s the first hurdle: the traditional lender requires full appraisal before releasing funds. This takes time, hence you offer the seller an extra $25,000 to keep the deal alive.
A close delay extends the holding period to nine months:
Interest (9 months) – $34,000
Origination and fees – $6,500
Holding costs (tax, insurance, utilities) – $18,000
Concession to seller – $25,000
Net profit – $146,500
Cash invested – $369,500 (Downpayment $225,000 + Rehab $120,000 + Holding costs and fees $24,500
ROI – 39.6% (52.8% annualized)
Example B – Hard money finance
A hard money lender will likely loan 90% of the purchase price and fund 100% of the rehab costs.
It leaves a loan amount of $930,000 at 11.5% interest with points and fees of $22,000 and a close time of only 10 days.
The fast close results in the seller accepting a $40,000 discount.
A holding period of only five months significantly reduces costs.
Interest (5 months) – $44,500
Fees – $22,000
Holding costs (tax, insurance, utilities) – $10,000
Net profit – $193,500 (including $40,000 purchase discount)
Cash invested – $132,000 (Downpayment $90,000 + Fees and reserves $32,000 + Holding costs $10,000
ROI – 146.6% (351.8% annualized)
With hard money, the flipper invests 65% less of their cash and boosts their profit margin by 32%!
Don’t be seduced by interest rates. Time and execution determine profits.
Avoid the pitfalls
Poorly structured deals can leave borrowers vulnerable for any number of reasons.
These include:
Optimizing for rates – a lower rate is worthless without clearly defined terms. Private lenders can foreclose just as quickly as traditional lenders.
Underestimating timeline risk – permit delays are common, especially in coastal cities. Private money rarely has the flexibility to extend terms when problems arise. Always give yourself a 90-day buffer at resale.
Overleveraging without exit discipline – private lenders may lend to the very edge of ARV. If the market weakens, your timeline is pushed out or your buyer’s financing fails, you’re in trouble. Exit discipline requires setting specific courses of action such as wholesaling, refinancing or selling as-is and the conviction to make decisions when things don’t go to plan.
Choosing lenders who don’t understand California markets – there are multiple finance options for flippers in California. That’s why smart flippers choose one that understands its vagaries, complexities and challenges. A flipper in Sacramento encounters different problems to one in Fresno to one in Los Angeles. Always borrow from a lender that understands and is sympathetic to these problems.
Get funding and support today
Hard money should never be an afterthought for flippers.
Rather, it is the first rein pulled by smart flippers because hard money lenders structure their loans specifically for the issues flippers encounter in California.
Whether your flipping business has been flourishing for five years or is just five minutes beyond its genesis, it’s critical to align yourself with an experienced professional you can trust.
That’s where Equidy can help.
Equidy is a hard money lender who can finance flippers and developers in as little as 48 hours.
It makes them the ideal partner for every flipping project in California, ensuring you never miss a deal.
They stand by their core belief that anything is possible and they strive to prove it every single day.
Even in challenging economic times, they vow to reward entrepreneurship and resolve to help their clients realize their wealth creation dreams.
But there’s a bonus.
Equidy has an intimate and personal history with all aspects of property development in California and has done so for well over 40 years.
This makes Equidy not just a lender but a strategic capital partner.
They will cast a discerning eye over your projects, ensuring you have a:
- clear scope and budget
- realistic timelines
- defined exit strategies
This will help guarantee the success of your projects and maximize the return on your investment without putting yourself at unnecessary financial risk.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
