Can Hard Money Support a Fix-and-Flip Investment Strategy?

Fix-and-flip is one way to make money in the real estate market. Under a fix and flip plan, an investor purchases either residential or commercial properties for rehab. After rehabbing, the properties are sold at a higher price. As for funding, there are options. Is hard money one of them?

Hard money is a preferred funding source for many a real estate investor. So in theory, someone pursuing a fix and flip strategy could fund each new acquisition with a hard money loan. But there is more to it than that. Hard money has its idiosyncrasies that impact its usefulness for funding fix and flip deals.

A Niche Investment Category

The first thing to understand is that fix and flip is considered a niche investment category. As such, not every hard money lender will fund fix and flip projects. Take Actium Partners out of Salt Lake City, UT.

Although the vast majority of Actium’s loans fund real estate projects in Utah, Colorado, and Idaho, the company stays away from fix and flip. They don’t do any residential deals at all, and commercial fix and flip projects tend to be more risky than Actium prefers.

On the other hand, there are hard money lenders whose primary focus is fix and flip. They specialize in this particular area of the real estate investment market and make good money doing so. The point to all of this is to say that fix and flip investors may have to shop around – and even go out of state – to find a hard money lender willing to get on board.

The Risks Are High

Even with a hard money lender providing most of the investor’s funding, fix and flip risks remain high. That is why lenders tend to charge higher interest rates and require shorter terms. That’s the only way they can reasonably manage their risk.

So what makes fix and flip so risky? The two biggest factors are:

  • Market Fluctuation – The real estate market fluctuates on a regular basis. Therefore, timing is everything. Fix and flip investors run the very real risk of purchasing a property, rehabbing it, and then not being able to sell it at a high enough price.
  • Rehab Costs – A fix and flip investor can only estimate rehab costs prior to purchase. He never really knows what the final bill will be until rehab is complete. Therefore, there is always a risk of spending more on rehab than the investor planned for.

Hard money lenders willing to fund fix and flip investments know all of this. They take it all into consideration when reviewing loan applications. Just like their counterparts who prefer to avoid fix and flip, these lenders consider all the details before deciding whether to approve a loan.

There Are Other Options

Few would argue that hard money is usually the best option for funding fix and flip investments. But that does not mean an investor will have no trouble finding a lender to help out. When no hard many lenders will get on board, there are other options.

Banks and credit unions have been known to fund individual fix and flip projects. There are also private lenders, peer-to-peer (P2P) lending platforms, and crowdfunding. Even bootstrapping that first property acquisition is not unheard of among new fix and flip investors.

Can hard money support a fix and flip investment strategy? Absolutely. But hard money is just one option. There are numerous ways to fund the first few properties an investor purchases. After that, cumulative profits can fund future purchases without any borrowing required.