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3 Reasons Flippers Need Private Money Loans to Fund Their Real Estate Project

As the gradual recovery continues, fixing and flipping real estate is back in a big way. In the second quarter of 2016, a total of over 50,000 flips of homes and condos were completed, according to information from RealtyTrac. That’s a six-year high. The ROI for flips is also very strong, averaging 49% this year, nearly twice the return seen in 2006.

It’s hard to overstate the importance of having capital on hand at the start of a flip project. You know that certain costs will be associated with renovation, and holding costs such as insurance, utilities, and taxes will have to be covered as well.

Securing funding can be challenging, even for an experienced fix and flip hand. Banks and online mortgage companies are willing to work with flippers who have some successful projects under their belt, but it can be tough for the novice flipper to get backing.

For this reason, they need access to so-called private money loans. This is a loan from people who have cash that they’re willing to invest in individual projects. The funds can come from friends, family, business partners, other real estate investors or anyone with cash.

Rates for private money vary widely, ranging from a very friendly 0% that might come from close family, up to 12%, which gets into the more predatory hard money lenders.

There are several factors that make private money loans the best source for novice house flippers.

1. Less restrictive

Private money loans are often available to those with less than stellar credit scores. Often, the minimum for this type of loan is a credit score of 620 or better, and debt-to-income ratio of under 35%.

2. Flexible terms

The terms of private loans are more flexible than those offered by either banks or hard money sources as well. Those may have limits on the amount of the loan, based on the property’s value after repair. Often they will only loan 65% of this amount. On the other hand, private lenders may supply 100% of the cost for purchase and repair.

3. Shorter timeline

Another important consideration in the flip is time. Distressed properties and foreclosures are ideal candidates for a flip, so buyers can find themselves having to come up with cash just hours after bidding on properties like this at auction. Banks and hard money lenders can’t meet this tight timeline, but private lenders usually can. With less red tape to navigate, private loans are often wrapped up within a couple of weeks.

The question for many novice flippers becomes: where does one find private money loans? One encouraging point to consider is that investors can expect good returns –often 8-12%– on their money, and it’s secured by real property.  With this information in hand, many flippers are able to find family, friends, or associates who are interested in investing.

Lenders can also be identified through networking with real estate agents, contractors, and other industry members. The American Association of Private Lenders can be a good resource, as can related groups on LinkedIn and other social media.

If you're looking to borrow funds for your next flip, be sure to explore your options on Patch of Land today. We’re always just an inquiry away and look forward to helping you make smart, sound investments. Connect today!

If you want to learn more, take a look at some of the most commonly asked questions we receive about real estate crowdfunding on a daily basis and find out why so many people are crowdfunding real estate projects across the country with Patch of Land.
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