Real estate is a great way to make money, especially if you increase the property’s value through renovations.
However, both purchasing and rehabbing require significant working capital. While it’s possible to use your own personal funds to launch your property investment career, you can find more flexibility and less risk by partnering with hard money lenders California.
So what are the best financing options for house flippers? Here are a few of the most popular loans, along with their pros and cons.
Fix and Flip Loans
Fix and flip loans are specifically designed for investors who plan to remodel houses before selling them. This means you can apply for funding that covers a wide variety of purposes:
Like many third party loans, fix and flip financing is short-term. Most loans last between 18 months and 2 years, which should be ample time for renovations to be completed. Once you’ve sold the property, you should be able to pay back the principal in one lump sum.
Of course, there is a downside: interest rates. Since fix and flip loans are short-term, they’re a higher risk to lenders, which means interest rates may be higher than a mortgage or home equity loan. However, the fast application process and incredibly flexibility make these loans well-worth using. Additionally, if you’re able to payoff the loan quickly, interest is less of a factor.
Many house flippers choose to partner with residential bridge loan lenders for the fast approval and flexibility. Like fix and flip loans, bridge financing is short-term, with most loans lasting 2 years or less.
Bridge loans are specifically designed to be quickly approved to provide a competitive edge to investors. In fact, some lenders can provide cash in as little as 24 hours. This allows buyers to jump on amazing offers and even gain leverage during the negotiation process. For example, sellers may accept a lower bid from a funded investor because they’re interested in getting immediate cash.
The one downside is that bridge loans can be a little more difficult to get than other alternative lending options, as many lenders require good credit. However, this can lower the interest rate, which saves you funds in the long run.
Home Equity Loans
When homeowners want to access the equity in their residences, they usually apply for home equity loans. If you currently own property, this could be a viable avenue through a bank or credit union.
However, this type of lending does come with some cons:
- Personal assets are used as collateral
- Lengthy application processes that can take over a month
- High approval standards require extensive paperwork and verification
These downsides can be serious disadvantages, especially if you’re just starting out as an investor.
When comparing a bridge loan vs home equity loan, it’s easy to see which comes out on top. Though home equity loans are useful when homeowners want to renovate their own residences, they just don’t cut it for the fast-paced world of property investment. Instead, you should look into financing through hard money lenders, as that funding is specifically created with house flipping in mind.