Myth vs. Fact: Can You Make Significant Profits With Hard Money Loans?

Myth vs. Fact: Can You Make Significant Profits With Hard Money Loans?
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When rehabbing a property, borrowers have a couple of financing options:

1. Traditional bank financing

2. Or a private hard money loan

Regardless of the financing method, the goal of any fix-and-flip is to maximize the return on investment (ROI). From the outside, conventional bank loans may seem like the best way to increase profits. However, when it comes to financing a fix-and-flip, there are tangible benefits to hard money loans that are not possible through conventional financing. These benefits ultimately position the borrower for a greater ROI.

The benefits of hard money loans are:

1.  Shorter approval timelines

Time kills all deals.

Experienced real estate investors know that time is of the essence when looking for the right investment. If a borrower attempts to secure financing through a bank, the process will likely take weeks, putting the borrower at greater risk of losing the property.

Hard money loans, on the other hand, can typically be approved within a week or two and provide the borrower with the cash they need quickly. As a result, borrowers are much more likely to secure the opportunities they believe can bring the most profit.

Shorter approval timelines also streamline the entire rehab process. With fewer qualifications required to get a loan approved, investors can obtain the funds they need quickly, ensuring a shorter overall project timeline.

2.)  Less money up-front

Most traditional lenders are conservative in their approach to loan-to-cost (LTC) ratios. Consequently, banks will generally only lend up to 65 percent of project costs. In turn, the borrower is forced to bring a sizable amount of equity in order to complete the project.

On the other hand, hard money lenders will typically offer higher leverage, in return for an increased cost.

Not only do hard money lenders typically provide financing for both the purchase and rehab of the property, but they also will offer higher loan-to-cost ratios—in some circumstances up to 100 percent of the purchase and rehab.

A higher LTC ratio reduces the amount of capital a borrower needs. Even with a higher interest rate, this more aggressive LTC approach positions an investor for a greater project ROI.

3.) Faster time-to-market

A prepared real estate investor will be in a better position to take advantage of a faster time-to-market to maximize the benefits of their hard money loan. Once the clock starts ticking, every day eats away profits.

One of the most important factors to ensure significant profits on any fix-and-flip is preparation. Ensure every aspect of the project is laid out and planned, from the budget to the timeline of anticipated improvements.

In order to prepare for the fastest time-to-market for a fix-and-flip, it’s crucial borrowers take the following into account:

1. Determine the scope of work needed to complete the project

2. Establish an accurate budget to follow

3. Understand the current market

Understand the scope of work:

Understanding the scope of work needed for the fix-and-flip will lay the foundation for the future of the entire project. Borrowers will need to solidify the following:

• Identify the contractor’s responsibilities

• Define contract objectives and project requirements

• Estimate materials and labor costs

• Determine payment schedules

• Outline standards, regulations, and any permit requirements

• Explain the tasks, duties, and limitations required

Establish an accurate budget:

Once the scope of work has been correctly identified, borrowers should establish a budget for the project. Sticking to a budget will help avoid those unanticipated expenses that can hold up the final outcome, costing not only additional money but also time.

• Create a list of what must be repaired for safety reasons

• Compile a list of all cosmetic upgrades that will be completed

• Itemize components of your budget into materials, permitting, and cost of labor, etc.

Know the market:

Understanding the market will help prevent your project from sitting on the market long after the rehab is finished.

• Perform market research about the area surrounding your house

• Talk with other investors to get an understanding of what buyers like

• Look into locations with foreseeable growth

• Understand factors that will affect the market: crime rates, the reputation of local schools, the opening of new businesses, etc.

• Understand the comps in the area and what they are selling for

Greater preparation will help ensure investors go to market faster to get the most return from their time and money.

Timing is everything in any real estate investment. Thanks to lower qualifications, shorter approval timelines, and higher LTC ratios, partnering with a hard money lender is an excellent option for an investor looking to maximize their fix and flip profits.


About Bay Mountain Capital:

Bay Mountain Capital has been in business for more than a decade, closing approximately 3,000 loans. We specialize in financing all types of residential and commercial property investments throughout Texas and Georgia. Using common sense and value-added approach, we strive to incorporate these principles into our underwriting and closing processes.

 As a direct lender, Bay Mountain Capital can close a loan within one day after receiving a complete file and clear title. The process generally takes two weeks for a residential loan but can be accelerated where circumstances require it.

 We are primarily an asset-based lender, which means that qualification requirements are limited. Our rates and fees are among the lowest in the industry.

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