If you're looking into real estate investment, you've probably run into two forms of private investment: hard money and fix and flip loans. These two loans are similar in many ways, and it's easy to confuse them if you're a beginner. However, knowing how these loans differ and when you should use them is critical if you plan to buy real estate that you will later sell for a profit.
How Are Fix and Flip and Hard Money Loans Similar?
While there are many critical differences to consider, these two loan types are also similar in a few ways. Buyers typically use both loan types for real estate investment properties, and these loans have shorter terms and higher interest rates than traditional mortgages. They also typically allow buyers to obtain financing quickly, which can be crucial when bidding on a hot investment property.
Despite the high costs associated with these private loans, they're valuable for buyers who intend to make a profit on their property. Although the relatively high-interest rates mean a more expensive loan overall, these costs can be offset by quickly renovating a property and putting it back onto the market. In general, the longer you hold a property, the higher the loan cost.
How Do Fix and Flip and Hard Money Loans Differ?
While both fix and flip loans and hard money loans utilize private investor money, there are a few key differences that you'll need to consider. A hard money loan typically looks only at the property's value and doesn't consider your personal borrowing history. In other words, a poor credit score or recent financial problems won't necessarily disqualify you.
On the other hand, hard money loans usually won't cover the entire cost, so you'll need more cash on hand for your purchase. Fix and flip loans typically cover a much more significant percentage of a real estate purchase, but they're also more challenging to acquire. Lenders will consider your FICO score and other aspects of your financial history before approving your loan.
Why Should You Choose a Fix and Flip Loan?
Fix and flip loans are a relatively easy option to begin investing in real estate, especially for well-qualified borrowers. Since a fix and flip will cover more of your purchase and renovation costs, you won't need to have as much cash on hand or spend time securing additional funding. Fix and flip loans may also have slightly longer terms and lower rates than standard hard money loans.
If you're considering investing in a property for rehabilitation and resale, a fix and flip loan may be an excellent fit. Make sure to discuss this option with your lender to determine if it's the right move for your situation.
For more information on hard money and fix and flip loans, contact a professional near you.