Getting the proper financial backing as a house flipper can be challenging. After all, flipping houses often entails moving as quickly as possible to turn a profit, and traditional loans can slow that process significantly. Luckily, we at LJC Financial put together this overview for how to finance a house flip with private money loans.
What Is a Private Money Loan?
Before discussing how a private money loan can help you finance your house flipping projects, it’s crucial to understand these loans and how they work. Essentially, this type of loan provides funding—usually for property investors—through private lenders. Private money loans are especially appealing to house flippers because they typically have more lenient approval criteria.
This is because your financial backing is coming from a private party, so you don’t have to worry about the stricter loan regulations that tend to come from large banks and credit unions. Additionally, their turnaround time is quick because it’s easy to get approval for these loans. So, when you’re looking to buy a property, flip it, and make a profit as quickly as possible, private money loans are one of the best options you have to help finance your projects.
Requirements of Working With Private Money Lenders
It’s worth noting that while private lenders have a more lenient criterion for loan approval, they still expect that a prospective loanee meets certain requirements. Below are the primary steps you’ll need to take to forge a trustworthy partnership with your lender and confirm your loan with them.
Step One: Provide a Promissory Note to Lender
A promissory note is a formal, written agreement between you and your lender. This document will outline each specific detail of your arrangement. Promissory notes are an integral aspect of a private money loan because they protect your lender and yourself if something concerning the loan goes wrong.
Step Two: Hand Over a Deed of Trust
The next thing you’ll need to do is give your lender what’s known as a deed of trust. This document secures your lender’s investment in the property you’re planning to flip. A deed of trust ensures that your lender has legal grounds to foreclose on your property if you fail to make payments or if something goes wrong with your project.
Step Three: Procure Hazard Insurance for Your Project
When you’re in the process of convincing a lender to back your house flipping projects, it’s imperative to procure hazard insurance for the properties you plan to flip. Insurance adds yet another layer of protection for your lender and yourself. Then, if any incidents happen on the property that result in extra expenses, the private lender can receive their funding back in full.
Make a Comprehensive Budget for Your Project
It’s crucial to create a comprehensive budget detailing how you plan to use the funding allotted to you. Account for the cost of purchasing the property and factor in any other expenses that might pop up during your project. For instance, you might need to set aside funds to cushion for unexpected delays or issues.
Think about how much you plan to spend on materials, work crews, and significant repairs. Additionally, it’s wise to calculate how much profit you’re hoping to see after you sell the property so that you can relay that information to your lender. The more you show that you’re looking out for their investment, the more likely your lender will feel comfortable giving you what you need to get the job done.
Use Your Funding Wisely
Once you get through the approval process, the next step is to ensure that your loan is being spent wisely and in the right places. To illustrate, say you work out a budget of $8,000 for tiling in the kitchen, bathrooms, and entryways. In this case, you’d want to avoid selecting tiles that might put you over budget. Instead, pick out materials that are top quality for your price range and avoid digging yourself into a financial hole.
As another example, suppose you have an inspection done, and the contractor finds that most of the roof is rotting and will need a total replacement. Well, this type of repair is going to put you far over budget. So, sit down and reevaluate your spending and, if necessary, adjust your budget for flipping the property. If you’re looking to get the highest profit from your project, proper budgeting is essential.
Pay Back Your Lender
Lastly, once you receive your funding and complete your house flip, it’s critical to ensure you’re paying your lender back as quickly as you can. Here are a couple of different ways you can do this:
One: Pay Their Interest Monthly.
This method works like most monthly payments; you calculate the amount and select an ideal length of time to pay back the loan in full.
Two: Pay Them Using Accrued Interest.
This method entails a lender’s interest accruing over time, which means they will receive their interest fees in a lump sum, along with the money you owe after you sell the property.
It’s always wise to discuss payment plans with your lender, so you can come to an agreement that works for all parties. Remember, no matter which route you take, being consistent in your payments will keep you out of debt and make a private lender more likely to work with you on future projects.
So, when it comes time to get funding for your next project, refer to this outline on how to finance a house flip using private money loans. If you do business down in Texas and you’re looking for private money lenders in San Antonio, give us a call. We’ll answer all your questions and come up with a game plan that works for you.