Are you ready to finance a house flip using a hard money loan? Read these 59 hard money loan tips to ensure you cover all your bases!
Tip #1: Overestimate Your Rehab Project Timeframe
Always expect the unexpected when flipping houses. Problems with property rehabs including contractor issues will extend the project timeline, leading to much higher costs. These can put the entire project at risk of failure. Always be prepared for these delays and have contingency funds ready to go when needed.
Tip #2: Overestimate Your Costs
When using hard money loans for house flipping, plan for the rehab to cost 1.5-2X as much as originally estimated. As mentioned previously, unexpected events and issues can occur that will raise costs. These will put your property flip at risk of foreclosure, so it is best to play it safe.
Tip #3: Never Overestimate the ARV
Overestimating the After Repair Value (ARV) can cause a shock to the flipper when the property hits the market and is not worth as much as expected. A good hard money lender will be able to judge the real value of the property and deny you a loan if he / she suspects you are embellishing the ARV.
You should always calculate the ARV using appraisal best practices (PDF from Freddie Mac). Do not guess when appraising the property value, as this can lead to major problems down the line.
Tip #4: Only Use Money You Can Afford To Lose
Like all investments, never pile all your cash into one investment, and never use money you can’t afford to lose. If buying and flipping a house involves risking your primary residence, retirement account, or children’s college fund, it’s probably not be worth it. Only use funds you could lose and continue the quality of life you and your family have been enjoying.
Tip #5: Do Not Miss Any Costs In Your Budget
This seems like one of the more obvious hard money loan tips, but it happens much more than you think!
Go over your budget multiple times to make sure you did not miss any items. Missing a major item (or series of smaller ones) can put your entire project at risk of failure. If you’re new to renovating houses we advise having somebody experienced look at your rehab budget to be safe.
A good hard money lender will generally discover missing items in your budget, but it’s best to come in with fully baked numbers to be sure.
Tip #6: Do Not Use Hard Money Loans for Buy and Hold Properties
Hard money loans are best used for quick flips, fix & flips and construction bridge loans. Hard money loans have high interest rates and points. They are useful for getting financing quickly to snap up and turn over a profitable property deal.
Buy and hold properties generate profits by minimizing costs and maximizing monthly cash flow. Do the proper cost analysis and only use hard money lenders as a tool to help you move fast.
Tip #7: Use a Local Hard Money Lender
One of our favorite hard money loan tips is to use a local hard money lender. Local lenders are more knowledgeable about the market you are investing in. They can accurately judge whether the property is worth and how much profit margin there is in flipping.
Local hard money lenders want to maintain a positive reputation in the investor community. They are less likely to scam borrowers or rush to foreclose if you fall into cash flow issues. There is a huge difference between being able to have coffee with your lender and operating thousands of miles apart.
Tip #8: Always Walk Away From a Bad Hard Money Deal
While this is not necessarily easy for house flippers to do, it is crucial. You’ve spent a lot of time and effort finding and negotiating, estimating costs and projecting profits under different scenarios. Not getting the deal because the hard money lender wants to gouge you might be the best thing.
This is where doing your homework, talking to other real estate investors in your network, and knowing how reliable hard money lenders work will pay off. Walking away from a predatory hard money deal will save you a lot of time and money.
Tip #9: Refinance the Property When Your Credit Improves
You might have credit issues when you finance your house flip. This is where hard money loans excel, since they are not credit-based.
But a hard money loan can be used to increase your credit if all goes well. As your credit improves over the course of 1 or 2 house rehabs, you can refinance the hard money loans with traditional mortgages at lower rates.
This will give you options to hold some properties longer and rent them out if you want. This is especially useful to rehabbers that want (or need) to hold properties for longer than 1 year.
Tip #10: Get an Extension On the Hard Money Loan
By “get an extension” we mean to refinance a hard money loan with another hard money loan. On a fix & flip project the initial hard money loan tends to cost a lot. There is much more work to be done, more project risk, and longer time to sell the property.
However, as the project progresses and the house starts to shape up, project risk drops. At this point, it may be beneficial to refinance the first loan with a second hard money loan at a lower rate and/or longer maturity. You might do this if the market softens, you want to change contractors, add on another room, etc.
However, this may not work if you’re facing rehab delays. You need to be able to show the projet is progressing well, and isn’t failing. Otherwise the new hard money lender will want to charge more, not less.
Your ability to refinance one hard money loan with another depends on your project state, the market, and how many lenders you have competing for your loan.
Tip #11: Buy a House That Has No Occupants
An empty house means there is nobody to evict. You won’t have to deal with potential vandalism from angry tenants on their way out. An occupant-free property means you can start working on the rehab project right away.
Tip #12: Make Sure You Have Sufficient Cash Reserves
This is one of the most critical hard money loan tips. A flipper seeking a hard money loan needs a well-developed budget and a 10-20% cash contingency set aside for unexpected problems. Without sufficient cash reserves, you could fail to complete the rehab and potentially lose the property to foreclosure.
Tip #13: Get a Bridge or Term Loan To Finance Part of the Flip
This can be useful during the later stages of the rehab. This is different than #10 above. In this case you’re looking to get an additional loan to provide more capital and bridge the construction-to-sale time gap. Essentially, this is financing to to hold the property for longer than the hard money loan period.
The additional loan can be structured as a bridge loan, business line of credit, HELOC, or even a personal loan. The main point is you’ve now got a second form of financing that bridges the cash flow gap.
Tip #14: Buy Properties After a Downturn
Similar to the 2008 drop, buying property in real estate markets that have seen a big downturn recently can produce significant profits. The key is to time the market and start investing as property values are starting to move up again. These areas could be prime opportunities to flip properties.
This strategy is not for the faint of heart. If you get your timing wrong, you can end up buying real estate, investing in a rehab, and watching it drop further. You should give yourself a longer “flip window” — up to a year — and work out the math so you could rent the property out if you err on timing.
Speak to your investment network and hard money lenders before investing in property after a major market drop. Involving multiple parties will ensure you have all available information and can take advantage of creative financing and property strategies.
Tip #15: Avoid Property Markets That Have Hit New Highs
Don’t buy properties when the market has been hot for awhile and begins to flatten out. A downturn could follow soon.
Tip #16: Don’t Use A Hard Money Loan If You’re New to Flipping
Following our hard money loan tips is important for newbies. If you’ve never done a successful house flip, using hard money financing can be very risky. It is best to avoid hard money loans until you have at least some experience flipping properties.
Raising capital through your private network to purchase a property and put in some sweat equity over a longer period of time can provide valuable rehab experience. It is often too difficult to get a job done quickly enough as a newbie without a well-oiled team.
Beware of using hard money loan financing right out of the gate as a new flipper. You can use this later for future flips.
Tip #17: Only Use Good Contractors
Take your time and find good licensed contractors and subcontractors to work with. Get your plan and team together BEFORE you commit to a hard money funded flip.
One good sign of a solid contractor is their honesty about unexpected issues. If your contractor commits to a schedule and highlights potential delays proactively, this is a good sign. You should always expect unexpected rehab issues to show up, and your contractor should, too.
Tip #18: Use a Hard Money Loan as Temporary Financing Until You Can Secure Permanent Lending
This is useful for flippers or rehabbers that want to hold the property longer than the maximum 1 year expected for a hard money loan.
Tip #19: When not Occupying or Renting the Property, Sell it ASAP!
With no cash flow coming in a property can eat a big hole in your bank account. The longer you hold the property, the less profit you make when financing with a hard money loan (or any loan). Don’t let a house sit empty!
Tip #20: Avoid Foreclosure at All Costs
This goes beyond our normal hard money loan tips. f you think you’re running into cash flow issues and may default on a payment, think hard before you do!
Many hard money lenders will begin to foreclose on the property within days of even a minor default. The first thing that happens is getting hit with daily late fees that can add up to thousands. Then a notice of default and foreclosure comes next, while the penalties keep piling up. Eventually you will lose the property and any cash, collateral and hard work you contributed.
Anything you can do to prevent missing payments is essential — sell the property, partner with another flipper, get a personal line of credit, sell a car, sell fixtures from the house you don’t need, etc. Just make your payments.
Tip #21: Don’t Accept Junk Fees
This is an important tip for hard money loans to avoid getting nickel-and-dimed! Some fees are a necessary part of the deal, but you should avoid any lender with a long list of fees and onerous-looking charges.
Some of the questionable fees and charges you might see include:
- Inspection fee
- Document prep fee
- Loan application fee
- Loan processing fee
- Underwriting fee
- Administration fee
- Daily late payment fees / penalties
Especially avoid a lender that charges additional points at the closing. Points are what mortgage brokers and originators are paid as a commission to sell loans. If you’re getting charged points, this means you’re dealing with a loan broker rather than the actual lender, or the lender is adding a charge unnecessarily.
Ask the lender to explain what each fee and charge is for, and justify why that fee is actually necessary. Does it pay for something mandatory like a third party escrow charge or property inspection? If not, why isn’t it covered as part of the interest charges on the loan?
Keep in mind that most hard money lenders are financed by equity investors. They are generally structured as investment funds, not banks that borrow and lend. This gives them wide latitude in how they document and analyze deals. It also means they don’t have layers of people to pay — they make their money from high interest rates and foreclosing on defaulted borrowers, not incremental fees.
Hard money lenders are not consumer mortgage banks and their fee structures shouldn’t look like it either. Avoid lenders with lots of unnecessary fees.
Tip #22: Your Bad Credit May Not Matter
Hard money lenders usually will lend based on the riskiness of the property, not the individual. Unless there are glaring red flags in your credit report, a lower credit score may not matter when seeking a hard money loan. Even a previous bankruptcy may not matter as much as you may expect.
Hard money lenders are more interested in the economics of the deal and your past history rehabbing and flipping real estate than your personal credit.
Tip #23: Hard Money Lenders Need You as Much as You Need Them
Here’s a hard money loan tip that flippers often forget: The lender needs successful borrowers capable of paying off high-interest short term loans. Without you they will not make any money. Negotiate accordingly.
Tip #24: Ask Seasoned Investors About Your Deal Before Committing
Even experienced flippers can benefit from getting an expert second opinion. Working with a seasoned real estate investor, CPA or broker can help you judge whether your deal is a good one before you fully commit.
Tip #25: Make a Spreadsheet That Proves Your Deal Is Good
Use a house flipping renovation cost spreadsheet whenever possible when making a budget and projecting cash flows and profits. This can help prove to the hard money lender your deal is a good one.
Tip #26: Check for Compliance with Owner-Occupied Lending Laws
If you plan to live in the flip property while you renovate it, your hard money lender must comply with your state’s owner-occupied lending laws. This applies when using a hard money loan as an owner-occupant or for a primary residence.
Many hard money lenders will try to skirt consumer lending laws. These laws have substantially greater protections against advertising, foreclosure and maximum interest rates (usury).
Any lender who does not raise this issue when you apply as an owner-occupied borrower should be immediately questioned. If a hard money lender is circumventing consumer protection laws, this is a strong sign the lender is not legitimate and it could be a scam.
When lending to an LLC or corporation, the hard money lender generally must follow commercial loan regulations. These are much more flexible and allow fast foreclosure and high interest rates.
Tip #27: Check the Hard Money Lender With the Better Business Bureau
Checking with the Better Business Bureau (BBB) will allow you to find any complaints against the hard money lender that occurred in the recent past.
Tip #28: Check the State Department of Licensing for Complaints Against the Hard Money Lender
Doing this will allow you to see if there have been any complaints lodged with your state’s business licensing department. You can often find details such as dates, parties, and any reprimands, fines, or license suspensions.
Tip #29: Make Hard Money Lenders Compete For You
Hard money lenders are in a competitive market, just like any other. They must offer the best interest rates, terms, and quality of service they can to get your business. Shop around and compare lenders. Then play lenders off of each other to get the best deal.
Most lenders will offer similar rates, but differ in terms of loan structure, quality of service, relationships and reliability during the term of the loan.
Tip #30: Make a Realistic Detailed Expense Budget
You need a renovation expense budget that is as accurate and complete as possible.
A local hard money lender will often have an expert walk the property and evaluate it to make sure your rehab plan is realistic. Even remote lenders will often hire a local property inspector or constructure project planner to do this.
Tip #31: Pretend You Are Going In For a Job Interview
When approaching a hard money lender, pretend you are interviewing for a job opening. Be prepared, look professional, and have all your facts and figures in line.
Tip #32: Do Everything You Say You Will
Keeping to your word builds trust and rapport with the lender. When you’re working with a reputable lender, demonstrating integrity can earn you flexibility if unexpected issues arise. It also helps with any future deals you may have with that lender.
Tip #33: Stage the Home With Rented Furniture
This will save you money rather than buying furniture. Staging a property really helps when you’re having a hard time selling it.
Don’t try to do this alone, get another person to help you, preferably someone who knows how to make a home look nice.
Also, use inexpensive cosmetic home items to make the interior more attractive. You can use throw rugs, pillows, and plants found at wholesale and used suppliers, Target, Walmart, etc.
Tip #34: Flip Multi-Family Properties With a Hard Money Loan
Some hard money lenders specialize in lending for a multifamily properties. These flips tend to be much more complex than single family properties, however. You have tenants to deal with, large-scale remodeling to keep a common theme, major bulk purchases of appliances, elevators, pools, grounds, stairways, etc.
If you are an inexperienced rehabber then you should generally avoid multifamily properties. A small duplex or fourplex can be an achievable project. But more than four units is beyond most small flipper’s capabilities and budget. If you have the budget and team, however, using this hard money loan tip can open up some big money opportunities.
Tip #35: Tell the Lender About Your Rehab and Flipping Experience
This can help if you have less than stellar credit, but a history of successful projects in the past. If you can get the rehab done quickly and to code, the lender will naturally be attracted to the deal.
If you’re inexperienced, don’t try to hide it. The lender will quickly figure it out. By being up-front and honest about your experience level this gives a trustworthy hard money lender the opportunity to offer additional coaching, financial review and connections.
Tip #36: Do Your Homework Before Contacting a Hard Money Lender
This is one of the most obvious hard money loan tips, but often ignored. Hard money lenders are there to get you a loan fast, but not to do the research and planning for you. Have all your documents, financial projections, property photos, collateral, etc. packaged up before getting on the phone with hard money lenders.
Tip #37: Your Flipping Plan Should Include an Exit Strategy
The hard money lender will not automatically know your exit strategy on the flip. Your plan should include whether you will seek refinancing and when you plan to sell the property. Most hard money lenders only care about when THEY will exit the deal (i.e. get repaid their principle + interest). How and when YOU intend to exit the property is less important.
Tip #38: Do a Pro Forma Analysis On the Flip
A pro forma analysis is an analytical projection of the financial details of the project. It should include the purchase price, ARV, rehab cost detail, and estimated holding period. It includes a full cash flow schedule including principle, interest, taxes, fees, costs and revenues. This goes beyond your rehab budget and maps out the entire economic picture. (NOTE: You probably want to use a professional house flipping spreadsheet program for this).
Tip #39: Include Pictures of the Property
Always have pictures of the property with you when you first meet with the lender. They should be high resolution and include important external and internal details that can help a lender judge the quality of the property.
Tip #40: You Must Have Skin In The Game
You must have a down payment to get a hard money loan. This protects the lender and shows you are willing to put your own assets on the line to make the flip successful.
Tip #41: Good Credit is Not Required, But Helps
Hard money lenders will overlook a lower than stellar credit rating if they have confidence the borrower can get the job done well. However, having good credit always helps.
Tip #42: Follow Through With All Lender Requirements
If a lender asks for something done by a certain date, make sure it is done. If not, the lender may withhold or delay funding, which could lead to a failed flip.
Tip #43: Regularly Communicate With Your Lender
Definitely maintain regular communications with the hard money lender. Discuss the rehab status, current contractor activities, expected completion times, possible property buyers, etc. This will show you are fully involved and committed to the flip. It builds trust with the lender and develops a strong relationship for the next time you need a hard money loan.
Tip #44: Find Hard Money Lenders at Real Estate Investor Meetings
First time house flippers can meet local hard money lenders at real estate investor meetings and meetups. Other real estate investors can provide valuable referrals to lenders they have had positive experiences with. You may also learn from other flippers which lenders to avoid.
Tip #45: Find a Hard Money Lender Through a Real Estate Agent Or Broker
Real estate agents and brokers that have been around for a long time may have worked with a few hard money lenders. They can provide valuable contacts. A real estate broker will not knowingly risk his or her reputation, so these are generally good recommendations.
Tip #46: Use Google as a Last Resort to Find a Hard Money Lender
There are many scam lenders on the web, believe it or not. If you go this route, make sure to read user reviews of the lender before contacting them. Speak with multiple lenders and spend time doing due diligence.
Tip #47: Ask About All Fees Before Agreeing to the Loan
Always ask for a detailed explanation of all the fees and the reason each is required. Leave no stone unturned. A real estate flipper should not have to face unexpected fees later in the process. It’s essential to ask, understand and negotiate all fees before committing to the project.
Tip #48: Never Pay for Upfront Fees That Are No Absolutely Required
Scammy hard money lenders will have a long list of upfront fees with clever names. The only upfront fees that are really required are the appraisal fee, bank fees related to wire transfers, title search fee (whcih you can order yourself), and escrow fees (which are not typically charged upfront). Negotiate your way out of any other fee.
Tip #49: The Lender Should Make a Custom Loan for Your Property and Financial Needs
Good hard money lenders are flexible and willing to make custom loan arrangements for flippers. Every deal is unique in some aspects, and crafting the financing plan for different contingencies can be important.
Experienced borrowers tend to be better at getting custom hard money deals because they know it’s important. If you’re new to flipping real estate or hard money loans then you may be OK with a plain vanilla loan. It all comes down to your specific deal.
Tip #50: Use a Lender With a Good Reputation
You can get referrals to trustworthy hard money lenders from other real estate investors, real estate agents and brokers.
Tip #51: When Starting Out Rehabbing Expect the Worst
Know that difficult rehab issues will arise in the process, and have contingency plans to fix them quickly. This not a guarantee that bad things will happen, but be prepared.
Tip #52: Don’t Cut Corners On the Rehab, Even If You Make a Big Profit
This will create a bad reputation with the hard money lender if it comes out the rehab was done incorrectly. Lawsuits after house flips for shoddy work that doesn’t meet code or hidden liens are bad news.
Tip #53: Use House Flip Cosmetic Improvement Strategies
This includes adding shine to the home, updating the bathrooms and vanities, and some high end features to get it to sell faster and make the buyer happy. New paint, walls, ceilings,and floors, lighting all should be considered for updating. Bake all these things into your hard money loan plan.
Tip #54: Buy the Worst House in the Best Neighborhood You Can Find
Doing this will give your flip the greatest chance of making a large jump in market value upon completion of the rehab. It will also make it easier to secure a committed buyer.
Tip #55: Stay Organized
A hard money funded house flip has many moving parts going on at the same time. These include contractors, stagers, potential buyers, and other properties the flipper is working on. Using a project management system to help you stay on track and keep your team members on schedule is highly recommended.
Tip #56: Make Sure the Title of the Property is Clear and Free From Liens and Encumbrances
Credible hard money lenders will demand a title search and may even request court research to uncover any latent liens on the property. Since the real estate is the main collateral, it’s essential for the lender to know any liens or encumbrances on the property.
The ideal situation is to flip a property with zero liens. Otherwise you will need to clear (pay off) each lien to be able to provide marketable collateral for the loan. If there are any liens, you should include this as a discount on the purchase price of the property.
Your title insurance company should be able to spot this early on. If not, a lien can delay the property transaction, especially if it is a short sale, potentially by several months.
Tip #57: Work With a Real Estate Agent Who Knows the Local Market
Real estate agents and brokers will know the local market better than just about anyone. Use them to help you find great deals and buyers for your properties. Forming long term relationships with local real estate players is very important for flippers.
Tip #58: Include a Cost Buffer in Your Budget
This one is critically important to have for unexpected costs that can show up during rehab. As mentioned earlier, you must expect the unexpected when flipping houses. A 10-20% cash buffer is advised.
Tip #59: Join Real Estate Facebook Groups to Learn From Experienced Flippers
Facebook is a great tool for anyone looking to network and communicate with other real estate flippers, investors and lenders. If you’re new to the flipping game it’s highly advisable to actively read and participate in the discussions in these groups.
BONUS TIP #60: Use Our Directory of Hard Money Lenders
If you’re in the market for a hard money loan then check out our Hard Money Lenders Directory with comprehensive listings of reputable lenders by city and state.
Use These Hard Money Loan Tips!
These tips should provide new and experienced house flippers with useful ways to keep profits high and costs low. Remember, if it is too good to be true it probably is. So, it is important to always be prepared and knowledgeable about the process before committing to any hard money lender or flip project.