House flipping can be a lucrative venture for experienced investors, especially when they leverage the right financing options. One such option is hard money lending, which is often the go-to choice for those looking to rehabilitate distressed properties. In this article, we’ll dive into what hard money lending is, why it’s ideal for rehab projects, and how a 20% down payment and maximum lending for rehab construction can set experienced flippers up for success.
What is Hard Money Lending?
Hard money lending refers to loans provided by private lenders, typically based on the value of the property being used as collateral rather than the borrower’s creditworthiness. These loans are short-term and carry higher interest rates than traditional bank loans but are far more flexible. This makes them an ideal solution for house flippers, who often need quick access to funds and may not have the time or credit score needed for conventional financing.
According to Brian Jahanbin with Maxim Lending, an expert in hard money lending, “These loans offer the flexibility and speed that traditional financing simply cannot match. For investors working with rehab properties, quick access to capital is critical.”
In the context of rehab properties, hard money lenders offer a quick way to secure capital for purchasing and renovating properties. Since these loans are secured by the value of the property, approval is often faster, and borrowers can bypass many of the stringent requirements that traditional banks might impose.
Why is Hard Money Lending Ideal for Rehab Projects?
Speed: One of the primary advantages of hard money lending is the speed at which you can access funds. For experienced house flippers, time is money, and hard money loans allow them to purchase and begin renovations on a property immediately. Traditional banks can take weeks, if not months, to process a loan, which is often impractical in the fast-moving world of real estate investment.
Brian Jahanbin emphasizes, “Speed is everything in real estate investing. Hard money loans allow flippers to move quickly, outpacing competition and securing the best deals.”
Flexible Terms: Hard money lenders are more likely to work with borrowers on flexible terms compared to traditional lenders. Since these loans are asset-based rather than credit-based, the lender’s main concern is the property’s value, which can be adjusted based on the property’s condition, the proposed renovation plan, and the borrower’s track record.
Leverage for Rehab Projects: Hard money loans often include both the purchase price and the estimated cost of the renovations, so investors don’t need to go through a separate process to secure construction financing. This means that the borrower can access all the funds necessary to purchase the property and complete the renovation under one loan agreement.
No Need for Traditional Appraisals: While hard money lenders may still require a property appraisal, they typically focus more on the After Repair Value (ARV) — the estimated value of the property after it’s been rehabbed. This approach is much more useful for rehabbers, as it allows them to borrow based on the potential value of the finished project, not just the current state of the property.
The Role of a 20% Down Payment in Hard Money Lending
For experienced house flippers, a 20% down payment is often a standard requirement in hard money lending, especially for rehab properties. Here’s why:
Lower Risk for Lenders: A 20% down payment ensures that the borrower has some “skin in the game,” which reduces the lender’s risk. The borrower’s equity in the project is important, as it indicates a commitment to the success of the project. Lenders are less likely to approve a loan with a lower down payment because they want to ensure that the borrower has enough financial investment in the project to complete the renovation and repay the loan.
Brian Jahanbin states, “A down payment shows commitment. Lenders want to know that the investor is financially vested in the success of the project.”
Higher Loan-to-Value (LTV) Ratios: Typically, hard money lenders offer loans with an LTV ratio of 65-75%, meaning they will finance up to 65-75% of the property’s current value or ARV. The 20% down payment helps the investor bridge the gap, securing the loan amount they need while maintaining a reasonable risk for the lender.
Equity Cushion: With a 20% down payment, flippers have an equity cushion in the property, which is important in case unforeseen costs arise during the renovation. This cushion also ensures that the borrower can sell the property for a profit, even if the market shifts slightly during the rehab process.
Maximizing Lending for Rehab Construction
Many hard money lenders offer rehab loans that not only cover the purchase price of the property but also provide additional funds for construction and renovation. This is particularly beneficial for experienced flippers who already have a clear vision for the rehab project.
Here’s how maximum lending for rehab construction can work:
Funds for Renovations: A portion of the hard money loan can be allocated to renovations, which is crucial for properties in need of substantial repairs. The lender will typically assess the borrower’s proposed renovation plan and allocate funds based on the scope of the work. This can include everything from structural repairs to cosmetic upgrades.
Draw Schedule: Hard money lenders typically use a draw schedule to release renovation funds incrementally. As the borrower completes certain stages of the rehab, they can submit for reimbursement. This ensures the lender that the work is being completed according to the agreed-upon plans before additional funds are disbursed.
Lender’s Oversight: Experienced flippers know that overseeing the construction process is just as important as purchasing the right property. Hard money lenders may require periodic inspections of the work being done to ensure that it meets their standards before releasing additional funds. This provides both the borrower and the lender with peace of mind.
Flexible Rehab Financing: Many hard money lenders offer flexible options when it comes to rehab financing. Whether you need funds for major structural work or cosmetic upgrades, a hard money loan tailored for rehab construction can cover everything from foundation repairs to new cabinetry and flooring.
Conclusion
For experienced house flippers, hard money lending is a powerful tool that enables quick access to funds for both property acquisition and renovation. A 20% down payment is typically required to ensure the lender’s risk is minimized while providing the flipper with a solid equity cushion. Additionally, maximum lending for rehab construction ensures that the borrower has enough capital to complete the project without running into financing roadblocks.
Brian Jahanbin of Maxim Lending Corp sums it up: “Hard money lending, when used strategically, can be the difference between a successful flip and a stalled project. It provides the speed, flexibility, and capital needed to turn distressed properties into profitable investments.”
For those seasoned investors who know the ins and outs of flipping properties, hard money lending can make the difference between a profitable venture and a stalled project. It allows for speed, flexibility, and the opportunity to maximize returns on rehab properties. When used wisely, it can unlock the potential of distressed properties, turning them into profitable investments in no time.
Brian Jahanbin Maxim Lending Corp NMLS#166917 (CA, AZ, GA, FL, TX, MD, SC, WA, CO, VA)
