A fundamental aspect of flipping houses is getting your cash in order ahead of time. Virtually no one has the ability to just walk up to a house for sale and pay cash on the spot. Real estate just isn’t handled that way. For many house flippers, financing your business projects comes down to two types of loans: hard money and private money.
There are other types of loans, of course, but these two really seem to be among the most popular for house flippers. The terms, the approval criteria, and the relationships (both professional and personal) all come into play when looking at money lenders and can often point you in the right direction for who you should be talking to about borrowing money.
Let’s take a look at each one to talk through the pros and cons so you can make an informed decision. After all, doing research and planning as much in advance as possible is more than half the battle when running a successful house flipping business.
Certain organized money lenders who are not banks, but operate as a loan company, can offer hard money loans. They have very clear terms for loaning money and base the loan on the asset that is being secured. Even though they use the same screening criteria as the banks, they are more likely to grant loans to individuals with credit histories that banks would reject.
The criteria for hard money loans can be stringent, and in some cases disqualifying, but they are very accessible and they are run by groups of investors with proven track records. Their decisions are backed by a business license, which means there is a level of professionalism behind the loan.
You should look at the terms closely, though. Often hard money loans have higher interest rates than normal bank loans. Hard money loans are more commonly used over the short-term which means you need to pay the money back sooner rather than later in most cases. Does your house flipping schedule allow for that to happen? Or are you planning on hanging on to the property longer than the terms of your loan? The answer to these questions will affect whether this type of loan is suitable for your project.
There’s a lot to consider with a hard money loan, so it’s important that you look through the terms, compare lenders carefully, and look closely at how the loan schedule fits in with your own schedule for flipping the house.
Private money is loaned from personal investors who do not represent a financial institution. It’s often a group of citizens that finance projects together, but it’s also just as often being given money from a friend for your business. Since it’s privately handled, the loan terms need to be very clear before money changes hands.
Private money loans are therefore obviously much more flexible than hard money loans. The terms can be negotiated much more easily and repayment can also be renegotiated. If a bank or other financial institution has turned you down, private lenders can still be talked into giving you the money you need to get a project off the ground. Things like a bad credit history can easily be overlooked in favor of your personal relationship with the lender.
Thanks to the internet these days, it’s also very easy to find a private money lender. There are companies out there that specifically offer private money loans for businesses, so it’s really just a matter of finding the right one for you.
However, when you accept a private money loan you are just as glued to the terms as you would be with a hard money loan. Even though you may be able to renegotiate terms, it’s not guaranteed, and you could find yourself stuck. Some people take private money loans because they’ve been turned down for hard money loans and they feel it’s their only option. This means you could end up accepting bad terms from the start because you don’t have a choice.
Just be careful and selective when looking at private money loans and understand that while they may be handled more casually in some cases, you are still beholden to them.