Even though fix-and-flip is not as popular as it once was, it is still a reasonable way to make money in real estate. Plenty of investors continue to purchase distressed properties and fixer uppers for the purposes of renovating them and putting them back in the market. Some finance their acquisitions with hard money loans.
This begs the question of whether hard money is a good way to fund a fix-and-flip strategy. Without knowing the context of a particular borrower’s circumstances, the easy answer is ‘yes’. But it is a qualified ‘yes’ for the simple fact that there is no perfect way to finance every fix-and-flip deal.
Not All Hard Money Lenders Are Into It
Anyone thinking of getting into fix-and-flip investing with the intention of funding acquisitions through hard money should know this before getting started: not all hard money lenders are into it. Salt Lake City’s Actium Lending is one hard money firm that does not do fix-and-flip funding. They focus primarily on commercial real estate transactions.
This is not to say that funding fix-and-flip is a bad deal. There are actually some lenders who specialize in it. It is to say that the fix-and-flip strategy is somewhat unique. It requires a level of expertise and involvement that just doesn’t appeal to all hard money lenders. So write off the bat, a new fix-and-flip investor needs to think long and hard about access to hard money before choosing to go that route.
Short Terms Are the Big Risk
Hard money loans are always risky for lenders. They can be equally risky for fix-and-flip investors for one especially important reason: terms are extremely short. How short?
Most hard money lenders prefer terms of 6-24 months. Keeping things around the 12-month mark is ideal for both lender and borrower. Going beyond 24 months is the rare exception to the rule in hard money.
This could be problematic for fix-and-flip investors. Ideally, an investor would want to close on a property, get it renovated, and get it back on the market in 3-6 months. But what if it doesn’t sell right away? What if the local market experiences a downturn right when the investor is trying to sell a rehabbed property?
There is always a risk that the investor will not get enough money out of a sale to cover what he borrowed against the property. Such circumstances would force the borrower to either come up with the remaining balance out of cash reserves or work with the lender to renegotiate the loan. Neither option is especially appealing when you are working a fix-and-flip investment strategy.
A Combination of Skill and Luck
Consistently making money with fix-and-flip relies on a combination of skill and luck. An extensive knowledge of the local market helps a lot, too. A lack in any of the three makes turning a profit a lot harder.
An investor needs the skills necessary to choose the right houses and make the right renovations without spending a fortune. He needs a bit of luck that the market will sustain his target prices consistently. Local market knowledge enhances both skills and luck for a successful fix-and-flip strategy.
As for funding, hard money is an option. There are other options as well. Some investors bootstrap their purchases. Others get started by soliciting startup funds from family members and friends, eventually building the business until it is self-sustaining.
Still other fix-and-flip investors rely on traditional financing. Traditional financing has its advantages, but it also has disadvantages. Some of those disadvantages are directly responsible for pointing investors toward hard money.