Planning a property development in California but don’t have much cash on hand for a downpayment? This is when many flippers and property developers should explore hard money loans. Here’s why.
Hard money loans are specifically tailored to the needs of real estate investors and developers who may be low on liquidity.
Traditional lenders often require a large downpayment for any property purchase.
But flippers and developers can usually acquire a hard money loan with a small downpayment – often as little as 10 per cent.
Why property flippers can be cash poor
Flippers are often cash poor because their money is nearly always tied up in their projects.
They may be highly leveraged, having already borrowed money just to purchase a property for redevelopment.
Or they may be working on multiple properties at the same time.
Either way, flippers don’t have vast amounts of spare cash and need a loan that requires only a small downpayment.
Funding options for flippers and property developers
Flippers have a limited range of options at their disposal when it comes to funding their redevelopment projects.
Bank loans – Bank or traditional loans are often the first port of call. But banks may require a downpayment of up to 30 per cent for investment loans. And they normally won’t lend money on distressed properties. They require extensive documentation and will rarely grant fast approval.
Home equity line of credit – If you already own a home, a line of credit secured by your home’s equity is an option. It can be a good option to access lower interest rates. But it carries significant risk. That’s because if you default on the loan, you could lose your home.
Cash out refinance loan – Similar to a line of credit, this allows you to borrow against the equity in your property. But it involves refinancing your existing mortgage, attracting more fees and precious time you potentially don’t have.
Bridge loans – These loans are designed to bridge the gap between the purchase and sale of your property while you redevelop it. They offer immediate financing but at relatively high interest rates. Approval will also rely on your debt-to-income ratio, home equity and credit score.
Private money loans – These are loans from family, friends or other private investors. They set their own rates, terms and conditions and are a viable option – if you can find one willing to invest in your project. You’ll normally need to have built a significant level of trust with the lender.
Why hard money loans are so attractive
There is one other viable source of funds for flippers, and that’s a hard money loan.
Depending on the circumstances, the borrower’s credit score and history may not considered when determining the merit of the loan.
This is because the property’s purchase price and its After Repair Value (AVR) are the most important factors.
This makes hard money loans considerably easier for flippers to attain.
Hard money lenders often lend up to 75 per cent of a property’s AVR, allowing investors to borrow a significant portion of the purchase and renovation costs.
There are many other reasons why hard money loans are the best solution for flippers:
Small downpayment required – often as little as 10 per cent, making them one of the best options for cash-poor flippers.
Fast approval – funds can often be approved and made available in as little as 24-48 hours. This is crucial for flippers who, for example, may need to act quickly when purchasing on sites such as auction.com.
Less paperwork – without a borrower’s credit history under the microscope, hard money loans involve much less paperwork and red tape than traditional loans.
Greater flexibility – the loan can be used not only to buy the property but also to finance the renovations.
Shorter terms – these typically range from between 6-18 months, often up to three years, and are designed to align with the time it takes to redevelop the property.
How to acquire a hard money loan
So you’ve found the property you want to flip and you’ve decided a hard money loan is the smartest way to finance it.
The good news is, Equidy can help you secure the finance you need.
At Equidy, our founders have an intimate and personal history in property, covering all aspects of real estate and property development in California for more than 40 years.
We believe anything is possible and we endeavour to prove it every single day.
Our goal is to reward entrepreneurship and help people turn their wealth creation dreams into reality.
We will quickly and efficiently lead you through the process of acquiring your hard money loan so you can begin what you are best at, flipping properties.
But our service does not end there.
We will work creatively with you every step of the way, providing our extensive knowledge and support as your project takes shape.
We enjoy long and established relationships with serious investors, sellers and real estate professionals.
And we leverage our reputation and trust by using clear communication to minimise the risk to all parties.
Contact Equidy today to book your free strategy call.
