Based on your results from our Real Estate Investor Quiz, we believe a Fix and Flip with Hard Money Loan may be the right investment option for you.
Fix and Flips involve purchasing a property that needs work. The scope of the work can range from the basic “paint and carpet,” to extensive overhauls, to scraping a decrepit property and completely starting over. It usually does not involve tenants, and the objective is to get in and out of the property as quickly as possible. You will need to have a good relationship with contractors, as this will make or break the project’s profitability. A knowledge of real estate and the local market is also key to ensure a project will be profitable. Analyze the property before you buy using our Fix and Flip toolkit.
This can be a great strategy for beginners with the right skill sets or the willingness to learn. When you finish, you can sell immediately, which generates cash (but you pay taxes at the higher ordinary income rate). Or, you can refinance and take out some or all of your initial investment. You can then keep the asset as a Long Term Rental or Short Term Rental. Learn everything you need to know about managing both types of properties with our exclusive Long Term Rental and Short Term Rental courses.
If you hold the property for a year, you now will pay capital gains and most people will reduce their tax rate percentage. When you sell, since you had the property for over a year, you can also deploy a 1031 exchange to legally defer your taxes.
Hard Money Lending
Since you likely need at least $40,000 to get started, you may need a hard money loan. These are sometimes referred to as a short-term bridge loan. Hard money lenders are individual or companies, not banks, and generally offer more flexibility and room to negotiate than a bank loan. Hard money loans are secured through collateral, not credit scores, making them attractive for individuals who don’t have a good credit history.
Watch this video to see how an investor used hard money to fund his fix and flip and walked away with solid returns and subscribe to our channel for similar content.
It can be much harder to turn a profit with hard money loans, and the property itself will be used as collateral. Therefore, it’s vital to have a good scope of the work, a timeline, and market knowledge of the property’s location ahead of starting a project.
Pros and Cons of Fix and Flips with Hard Money Loans
Pros of Fix and Flips with Hard Money Loans
- Because you have the option to use hard money lending, having a good credit score is not necessary.
- Projects done well can be extremely profitable. Check out this flip in Littleton, CO that sold for over $1MM.
Cons of Fix and Flips with Hard Money Loans
- Fix and flips are time and potentially labor intensive. It will take time to find a good project in addition to the time it takes to complete the work. It’s very important to do your due diligence before purchasing the property to avoid making any mistakes.
- Flipping can be risky, especially if done in a hot market. This risk increases with the use of a hard money loan that uses the property as collateral.
Learn the flipping process from start to finish with our ELEVATE Your Flip course. This course is geared toward investors who are interested in flipping but don’t know where to begin. We teamed up with Derek Marlin of ELEVATION, a local Denver company that specializes in re-development (Fix & Flip), consulting, wholesaling, and offers a unique Partnership Flip system.
If Flipping is not for you, check out these results that you also qualify for Wholesaling, Lease Options (Owner Carry), Short Term Rental Sandwich Condo.