Here’s Why Private Lending is the Best Option for Fix and Flip Projects

Home flipping can be great for investors looking to make a quick profit in real estate, but often times it’s difficult to find a lender that can fund an ambitious renovation project. Traditional lenders like banks and credit unions tend to shy away from these projects, and their application process is extensive with long approval times. On the other hand, loans offered by private lenders can be approved faster, and have customizable terms that are better suited to home flipping. They’re an ideal financing solution for fix and flip projects for a number of reasons. Let’s cover a few of them.

Let’s Define Private Lending

The term private lending simply refers to any individual or entity that is willing to lend you their own money at a certain interest rate. They can be organizations that operate in the real estate space, or simply individual investors. Private loans are typically secured by property, which allows the lenders to be more flexible with who they lend to, the properties they lend on, and loan terms. Unlike traditional mortgages, private loans can be much shorter in duration. For home flipping, they can also provide additional funds to cover renovation expenses on top of property acquisition costs.

Why Traditional Financing Often Falls Short for Fix-and-Flip Projects

There are some known challenges that come with using traditional financing methods for home flipping. First, aside from their lengthy approval process, banks often have strict criteria for the types of properties they will lend on and may view a renovation project as too risky. They are less flexible with property types and customizing loan terms. Plus, mortgage loans are typically issued for 15 or 30-year periods, which doesn’t make much sense for quicker transactions like home flips.

Key Benefits of Private Lending for Fix-and-Flip Investing

Using private loans is typically more suitable for home flipping for a few key reasons:

• Speed: In any real estate transaction, speed is crucial for seizing time-sensitive opportunities and reducing holding costs. Private loans are known for being much faster than traditional mortgages, with loan approval and funding happening sooner.
• Flexibility: Private lenders are more flexible with approval and loan terms, because loans are secured by collateral. This means you can use them for a wide range of investments, including home renovation projects, and you can still be approved for a loan with a limited credit history. Lenders will be more focused on the value and potential of the property than the borrower’s creditworthiness.
• Tailored Loan Programs: Private loans can be issued for shorter periods that fit the timeline of fix and flip projects. Additionally, they offer flexibility with customized repayment options, such as interest-only loans. This allows you to focus your available funds on completing renovations, and repay the principal loan amount once you have sold the property.

How to Find the Right Lender

When it comes to selecting which lender to partner with for your project, there are a few key criteria you should consider. It’s important to vet each potential partner carefully; ensure that they have a proven track record of financing fix and flip projects, and check customer reviews to see what the experience of working with them is like. Then, carefully examine loan terms especially with regard to repayment schedules, interest rates, and fees such as prepayment penalties. A quality lender will not only be able to fund your project, but they should also be communicative and be able to provide you with a good experience.

Your lender should be a reliable resource for real estate connections and investment planning tools. As you build a relationship with them, you may even gain access to benefits like a streamlined application process.

Risks of Using Private Loans

As with any other investment, there are some risks that come with using a private loan for real estate, and you should be aware of them before diving into a project. Most loans tailored to fix and flip investing have elevated interest rates due to their short-term nature. This means a delay with a fix and flip project will lead to severely high holding costs. It’s important to have a good plan and timeline set for your project to help ensure that you stay on track. It may also be worth having a contingency plan, such as refinancing and leasing the property until you’re in a better position to secure a sale.

RCN Capital

The easiest way to save on your next investment is to obtain financing from a real estate lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are looking to finance a fix and flip project, RCN Capital has competitive loan options available.