Creative Financing For Fix and Flip Rehab Projects
As a hard money lender I see many different rehab projects every week. One common theme that everyone I speak with shares is the need for funding. This is true for not only new investors just getting started, but also for experienced rehabbers who are looking to expand their business or leverage the cash they have to take on multiple projects at once.
When it comes to financing fix and flip rehab projects, there are a few basic avenues to explore. Of course if you can pay all cash for a property and the rehab, that is an option to consider. You will not have the expenses that come with financing, and you can work on thinner margins. This is not an option for everyone, however. Even people who do have the ability to pay cash often times would prefer to use other people’s money for a number of reasons.
Hard money loans for your rehab projects are one way to go. With a hard money loan on a short term fix and flip you can typically obtain financing based on the ‘as complete’ or ‘after repair’ value of a home. The benefit of this is that you will need to bring less cash to the table than you would with a loan based on the purchase price. In addition, these loans are typically going to also fund the cost of the rehab and interest on the loan so you don’t have payments to make out of pocket while the property is being rehabbed and readied for sale.
With a hard money loan, however, you will still need to bring some cash to the table. A good rule of thumb for my clients is about 20% of the total project cost, assuming the ratios involving the after repair value are in line. For a number of investors starting out, this is more than they have available. That is where other financing options can come in.
One benefit of using a hard money lender for your rehab financing is that you have the flexibility to obtain subordinate financing. This means you can find someone to lend you the down payment money required and they can secure that loan with a second position loan. You can find this kind of secondary financing in a few places.
The first place to look is the seller of the property. Depending on the situation, they may be willing and able to carry back a portion of the sales price. This tactic will not work with bank owned property or short sales, but for a private party sale, this can work. The benefit to using seller financing of this nature is that it is typically going to be less costly than many other options. But what if the seller cannot or will not carry back? In that situation, we need to explore additional options.
One of these additional options is gap funding. A gap funder is basically a private lender who will lend the ‘gap’ between what a hard money loan will fund and the total funds required. So if you have a hard money loan of $100,000 and you need $20,000 to close on top of that loan, a gap funder would lend that $20,000.
The upside to using a gap funder is that you can essentially purchase rehab properties using other people’s money – with little or no cash out of your own pocket. The downside is that gap funding can be expensive. You can expect to pay more for the gap funding than for the hard money loan. In addition, many gap funders may want some participation in the project, meaning they would earn interest on the money they lend, plus they would take a percentage of the profits.
If a gap funder is not for you, another option to consider is finding a joint venture partner, or an equity partner. This arrangement would work similar to the gap funding, where your partner would bring the cash needed to close, and you would purchase, rehab, list and sell the property. When the property is sold, your partner would get their initial investment back, plus they would get a percentage of the profit. The benefit to this arrangement is that you typically are not paying interest on this money, you simply are taking on a partner with whom you share the profits. Again, this is a situation where you can get into a rehab deal with little to no money out of your own pocket.
There are many creative ways to raise the funds needed to purchase a fix and flip rehab property these days. I specialize in creative financing solutions, and am always available to discuss the options we can help provide. If you are looking for creative financing for rehab properties, give me a call today at 877 462 3422.