11 Questions to Ask Yourself Before You Start House Flipping

Young couple working on a house.

The majority of hard money lenders are legitimate businesspeople looking to fund legitimate projects. For many house flippers it’s a good source of capital because of the ease and speed of the transaction. What sets Lead Funding apart from other lenders is we do not require tax returns, income verification, or pre-sales (for builders) and are able to close most loans in a matter of a few days. We can loan up to 100% of the purchase price and up to 100% of rehab costs with not minimum payment or capital requirements.

Mike LaCava with Bigger Pockets outlines 8 truths about Hard Money

1. Hard Money Is a Legitimate Business

Hard money is basically refers to a business or individual who lends as a business. They’re no different than a bank—at least to some degree—because they, in essence, do what banks do: lend money. But with a hard money lender, you don’t have to be approved by home loan review committees, eliminating much of the bureaucracy that’s involved with a bank.With hard money lenders, it’s just you, your deal, and the judgment of the hard money lender to determine your ability to repay the loan.

2. Hard Money Just Means the Loan Is Backed by a “Hard” Asset

When you borrow money from the hard money lender, the loan is secured with collateral which is the “hard” asset which would be the real estate.

3. You Can Make Significant Profits With Hard Money Loans

Hard money lenders do charge higher than average rates for a loan, but if you’ve done your house flipping math correctly by factoring in all the costs you can still make a nice profit.

You should exercise caution when using hard money. You want to be able to look at your numbers when going into a property and analyze them carefully, knowing full well your cost on borrowing that money.

If you know your numbers cold and factor in your financing costs and still come out ahead per the 70% Rule, then hard money is a good funding source for you.

4. Hard Money Loans Do Work for Longer Rehabs

If you happen to get into a deal where you’re paying an interest rate of 15% with 3 points, you’ll want to calculate that in a deal analyser and run the math and really see what that cost of money is going to be for different time scenarios.

Run those numbers out for six months and really see what they come out to. Then take all your soft costs, one of which would be your hard money interest, add in the real estate commission of 5%, and all your other costs. These holding costs include utilities, taxes, as well as any maintenance that’s needed.

Then add up all those costs and then see what that number comes out to. Run them for 12 months too – so you can plan your exit strategy in advance.

If you still are in the black under this longer term “worst case” scenario, then hard money is a good funding source for you.

5. Hard Money Rates Are High, But Here’s Why

Hard money lenders need to protect themselves from downside risk with you, so in taking that risk, the money they make should be higher.

6. Legitimate Businesses Do Business With Hard Money Lenders

There are many reasons why people can’t do business with banks. Just because you may not be able to get a loan from a bank does not mean that you’re not bank-worthy, per se.

All it means is that with the strict guidelines, it’s harder for banks to lend money out—even if they feel good about lending to an individual.

If this is the case, it means you may be very bankable, but because of how your tax returns look, you become ill-suited for a traditional loan.

Many legitimate businesses use hard money loans—not just in real estate—but in all forms of business. This includes funding for capital equipment and for continuing operations.

7. Hard Money Lenders Typically Won’t Finance 100% of the Loan

Most hard money lenders will want to know if you have skin in the game. If you don’t, they typically will not loan you the money—UNLESS they’ve done business with you before.

8. If You Have Zero Money, You Can Still Get the Deal Done

In the beginning, you need to have skin in the game. But funding that portion of the deal through any of your own resources isn’t as difficult as you would think.

You probably have at least one of these: some savings, an equity line of credit, credit cards, or you could fund your portion through a friend or a family member or a business associate or a partner.

With the hard money lender’s loan, the good news is that the amount you need to borrow is a far smaller amount of money than before the hard money loan.

This can be the difference between looking for a thousand or tens of thousands of dollars and looking for multiple hundreds of thousands of dollars (depending on your market).

The smaller amount is far easier to raise than the full amount—and between the two, you’ll have full funding for your flip.

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