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In real estate, there are many investors who look for ways to maximize the return on their investment as quickly and efficiently as possible. As a result, many investors have turned to the allure of trying to flip houses in order to build their wealth.
The only question is, how can you finance these investments?
Trying to flip houses is an interesting niche for investors because it requires them to work backwards with each property. Instead of planning for long-term cash flow or bunkering down as a property appreciates over time, investors need to determine how much they will be able to increase the value of a property rapidly and then calculate how much time, money, and effort it will take to get there. This creates a level of uncertainty and risk that some traditional lenders do not want to take on.
So, the alternative is to pursue private money from lenders who are willing to roll with the risk.
Before we dive in, if you are looking for the best financing to flip houses today, click the link below to book a free strategy call so that we can match you with the best option for your portfolio and finances.
Flip Houses with Traditional Lenders vs Private Lenders
When it comes to learning to flip houses, there are some key differences you need to consider when it comes to using a traditional lender as opposed to a private lender. After all, while private lenders are more likely to agree to finance your attempt to flip houses as long as it makes sense from a business standpoint, traditional lenders are going to be more selective about the properties they agree to secure loans against.
As a result, the overall condition of a property will often be a key factor in deciding which type of lender you should use. If a property is in generally good condition, you may be able to find a traditional lender who is willing to work with you. However, the better the condition of a property when you start to flip houses, the smaller your expected profit margin will be. This makes more heavily distressed properties more appealing to investors who flip houses, even if traditional lenders do not want to touch them. This is where private lenders come into the equation.
Discover How To Apply For An Investment Property Mortgages With This Step By Step Guide
Why Would You Choose a Private Lender to Flip Houses?
Now, there are plenty of reasons an investor may want to go with a private lender for their flips. Some of these reasons are:
Low Credit/High Debt Ratios
If an investor has low credit or high debt ratios, private lenders may be the answer. Finances are constantly shifting and if an investor is undergoing multiple deals in a short period of time, their credit may begin to take a hit and their debt-to-income ratios might spike for a period. While these are not necessarily indicators of a poor financial position and might simply be temporary side effects to taking on new investments, these can still deter many banks and major lenders who look at it as an indication of excess risk.
Meanwhile, private lenders are much more motivated to work with this level of risk and finance a property anyways as long as the overall plan makes sense. This is because while A and B lenders will usually qualify their clients and investors for a mortgage, most private lenders worry about qualifying the property so that they can sell it quickly in the event that the investor winds up defaulting on their mortgage.
Reduced Limits on Properties
If an investor is doing a high volume of deals, many major banks and traditional lenders might refuse to do business with them because they have hit their cap on the number of mortgages, they are able to have at one time. While there are certainly traditional lenders out there who have higher limits, investors may opt to bypass these limits entirely by going with private lenders who do not impose mortgage limits on their clients.
Diverse Lending Options and Exit Strategies
Unlike banks and other traditional lenders, private lenders are much more open in terms of structures. So, instead of trying to qualify for the best individual mortgage product at one lender, investor may look to private lenders for a more customizable experience that better suits their portfolio.
As well, private lenders often have more options when it comes to developing an exit strategy. While a major bank may penalize an investor for breaking their lease early and selling a property, there are private lenders out there who will not impose the same fees on breaking your term early. This is great for investor performing a flip because in many cases, investors are listing their properties within three-to-six months of making the purchase because the work has been completed.
Traditional Lenders Won’t Approve the Purchase
Finally, depending on the type and condition of the property being flipped, traditional mortgage lenders may not want to touch the property at all. In this case private money may be the only path forward in order to make the flip happen.
Remember: Private Lenders Manage Risk Differently
Private lenders are advantageous to investors looking to work on projects with higher levels of risk, however they do come with their own risk managements systems that may deter certain investors. In exchange for working with higher risk clients and properties, private lenders typically charge much higher interest rates than traditional lenders. This is often not a major deterrent for flippers because they do not plan to hold on to a given property for long meaning that the impact of a higher interest rate is minimized for them – provided they are able to sell their property in a timely manner.
How to Find the Right Lender for You
If you are ready to begin locking down the best mortgage rates from the best lenders for you and your investments, let us help you. At LendCity, we work with a wide network of lenders in order to ensure we can get you the best financing available for all of your investments.
For more information or to apply online, visit us at LendCity.ca or call our office at 519-960-0370. Alternatively, click the link below to book a free strategy call today and let us help you find the right lender to help you flip houses.