Understanding How Hard Money Loans Work In The Renovation World

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So you want to renovate a home. There are plenty of reasons why you might want to get into the business of flipping houses — or even just try it for the first time — and now is the time to do it. 2014 alone saw 327,069 homes get repossessed. And repossessed homes are exactly the type of houses that are ripe to be “flipped”. This is because, typically, repossessed homes are sold for much less than their original prices. Therefore, they can be sold for a fraction of what comparable homes would be sold for, renovated using the money leftover, and then sold for a big profit. Of course, even repossessed homes cost a good amount of money, and often require loans. Many potential buyers find that they can’t get the traditional business loans they would like — and so they look into renovation lending. Renovation lending works a bit differently than traditional lending, offering hard money rehab loans rather than the loans you might be familiar with. But that doesn’t mean that hard money rehab loans are inferior — on the contrary, they can make a big difference for those who want to get into the house-flipping business. Below, we’ll look into why you might need these types of loans, what they are, and much more.

Secured Short Term Loans: Why Might You Need Them?

Hard money rehab loans are preferred by potential house flippers over traditional loans for a variety of reasons. The most common reason is that the people that want traditional loans are often denied them. You may be denied a loan for credit reasons — as many people have to use student loans to go to college, they find themselves being denied loans due to circumstances they couldn’t have prevented. The usual requirements for a person seeking a business loan are surprisingly strict as well. Typically, a borrower seeking a business loan has to have been in business for at least two years, have at least $250,000 in annual revenue, have good personal and business credit, and be cash flow positive. If this doesn’t sound like a requirement you can fulfill, you might need to look into another option. And that option could very well include hard money rehab loans. Hard money rehab loans are simply more accessible, and in fact made for people who can’t secure traditional loans. Often, there are specific types of hard money loans for real estate investors — but they do work differently from traditional loans.

Commercial Real Estate Investing: Understanding Hard Money Loans

Immediately, hard money loans are very different from traditional loans. Hard money loans have higher interest rates than traditional loans — they usually start at between 15% and 18%. These higher interest rates come with lower loan to value ratios. As hard money loans don’t come with the same strict requirements as traditional loans, investors are usually protected in other ways. In particular, they often require securement through 30% to 50% equity. The duration period will also be different. While the duration of a traditional loan can be anywhere from one year to 20 years, a hard money loan often has a duration period of up to five years. With all of this being said, you shouldn’t take hard money loans lightly. Therefore, you need to be sure about whether or not you want to get into the renovation business.

Flipping Houses: Is This The Business For You?

Undoubtedly, flipping houses comes with a certain amount of risk. But with risk comes reward — and if you’re ready to work for the rewards of flipping houses, you might be ready to try it. Be prepared to spend, and for that matter keep your finger on the pulse of the real estate industry. In order to reap the greatest benefits, you need to know what the buyers in your area want. It’s like any other business: be smart, and you’ll be successful.

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