Lending/Financing Options for a Flip

[Molly Arnott]

Hi there! I have done 3 live-in flips in my local market but am currently on the hunt to do my first "professional" flip. I'm wondering if anyone can advise me the benefits of using a hard money lender versus conventional financing to fund the purchase & rehab. I believe we have the funds to cover the down payment and the rehab although I'd love to leverage financing as much as possible because it'll be cutting it tight with the funds I have available. Thanks for your help!

[Andrew Postell]

@Molly Arnott I certainly feel that there are some very specific differences between Hard Money and Conventional Financing.  I'll try to break them out seperately and then give some more follow up too.

• Hard Money Lending - Can wrap in renovation costs. A temporary loan (so you will have to refinance). High costs when comparing to other loan types. But the 2 main reasons why Hard Money is so great - Fast Closings and the loan is based off the ARV of the property. Meaning, if you could "buy and rehab" at 70% ARV...then in theory, you could come out of pocket $0. Really big advantage with that element.
• Conventional Lending - Slower closing (MUCH slower). A permanent loan (30 year fixed), so no need to refinance. Can still roll in renovations but more paperwork. Lower closing costs, loan will ALWAYS need a downpayment though. Minimum downpayment is 15%. So even if you do buy and rehab at 70% ARV...you will still need a 15% downpayment of your purchase price + rehab costs.

The main crux that most of these scenarios come down to is "how can I close quickly" and "what's my lowest out of pocket costs".  And the answer to both of those questions usually is to use Hard Money.  So while their closing costs might be higher, coming out of pocket less and closing quicker is usually the solution that we need when buying an off market property.  I hope all of this makes sense.

Feel free to ask anything additional if you need.  Thanks!