Should You Fund a Fix & Flip with a Hard Money Loan?

David Cohn
Jul 9, 2021
Hard Money Loans

Fixing and flipping means purchasing a distressed commercial property, fixing and renovating it, and then selling it for a profit.

It is one of the most effective strategies for commercial property investors to realize real profits in a relatively short amount of time.

Fix and flip projects require a lot of hard work and carry a certain level of risk, but it can be an incredibly profitable and rewarding experience for investors who know what they’re doing.

Do it well, and there’s certainly good money to be made in flipping a commercial property. But for investors who are not liquid, there are financial barriers that need to be overcome to get started.

Traditional mortgages from conventional lenders like banks are designed mainly for long-term, long-occupancy properties, so they are not suitable for investments.

A new loan model was needed to fill that gap—and this is where fix and flip loans come in.

Fix and flip loans defined

A fix and flip loan is a short-term financing solution designed for investors who want to purchase, fix, and resell a commercial property for a profit within a short amount of time (usually between 12 to 18 months).

There are several kinds of financing that commercial property investors can use for their fix and flip projects, including the following:

  • Hard money from private investment groups
  • Hard money from individual lenders
  • Crowdfunding from specialty commercial property financing websites that offer hard money loans (usually with less flexible terms)
  • A cash-out refinancing that essentially remortgages the property
  • Acquisition lines of credit

While a ‘fix and flip loan’ can mean a number of different commercial loan and financing options, it is often used synonymously with ‘hard money loans’ by experienced commercial property flippers.

That’s because fix and flip loans and hard money share the same characteristics of being designed specifically for fast-moving deals.

Some flippers use lines of credit for their projects, but in general, fix and flip loans refer to hard money loans from private investment companies and individuals.

Fix and flip loans compared to traditional loans

Traditional mortgage loans and fix and flip loans can both be used to buy a commercial property, but they are very different from each other.

  • A typical fix and flip loan duration is 6 to 18 months, while traditional loans last from 15 to 30 years.
  • Interest rates on hard money loans are much higher as well.
  • The purpose of fix and flip loans is defined as short-term investments, while traditional loans fund properties that will be used by the owner for a long time.
  • They also differ in terms of collateral; fix and flip loans use the property in question, while traditional loans rely on both the property and the borrower's personal credit history.

Fix and flip loans compared to construction loans

You may be wondering if you should take out a construction loan instead of a fix and flip loan if you are planning to do some construction on the property.

Is there a difference between the two loan types? Most fix and flip projects involve some construction, and you can certainly use a fix and flip loan to fund those requirements.

In contrast, a new construction loan is designed to build commercial properties from the ground up or completely destroy an existing structure for all-new construction.

Which one should you use? Both loans share the same terms and processes, but in many cases, the best option is a hard money fix and flip financing solution because it provides more speed and flexibility.

Advantages of fix and flip loans

Many commercial investors routinely use hard money financing for fix and flip projects because of the many advantages offered by this type of funding solution:

  • Flexible requirements and terms – Unlike traditional loans, hard money from private investors is not subject to the same strict processes, stringent requirements, and rigid structures. Even if you don’t qualify for a traditional bank loan, you may still be approved by a Commercial hard money lender if your project makes sense.
  • Quick access to cash – You’ll probably need cash on-hand right away if you are bidding on auctioned properties, foreclosures, and other time-sensitive deals. A hard money loan can give you cash immediately. They can be processed within a week or two, unlike traditional bank loans that take months to get approved.
  • Lower risk – Traditional loans are often backed by the property and by your personal credit history as the borrower. In contrast, hard money fix and flip loans are only backed by the property.

Disadvantages of fix and flip loans

Hard money loans come with relatively higher interest rates because they are intended for short-life projects. But there is always a risk that the flip might take longer than planned. Renovations might take much more time to complete, or the property might end up sitting too long in the market.

In these cases, the high-interest rates may start becoming a huge burden and source of stress for the borrower.

Tips on getting approved for a fix and flip loan

There are many lenders offering hard money loans for fix and flip projects, but they don’t just hand out cash to anyone who wants to try their hand at commercial property flipping. As a borrower, you need to know how to present yourself correctly to potential lenders to make them willing to invest in your project.

Here are some of the things you can do to increase the chances of your application getting approved:

  • Know how much you need. It’s important to count the costs before you even apply for a fix and flip loan. Do note that flipping a property means more than just spending money on the purchase and renovation costs. You have to factor in marketing and carrying costs, too. Layout all your expected expenses on paper to demonstrate to a potential lender that you’ve done the math and make them understand your project.
  • Ask them about construction draws. In some fix and flip loans, you can only draw money from the approved loan amount as construction milestones are met. Make sure this is clear to you.
  • Create a project schedule. The lender wants to know exactly what work needs to be done and when each stage of the project will start and end.
  • Understand what lenders are looking for. Requirements vary from one commercial hard money lender to another. Find out whether you need to establish an LLC, what type of insurance they want you to carry, etc.

As a borrower, you want to work with a lender who knows what they’re doing. The right lender is a financial partner that knows how to identify and finance successful commercial flips.

Try to find one that understands your local market. If you know other commercial property flippers in your area, ask them for recommendations.

Lenders who understand your locality can become true business partners. They understand the market trends and can even refer you to contractors and other service providers if you need help.