In the world of fix-and-flip projects, real estate investors are always on the hunt for the best financial option with a high yield. Two standard options for investors are hard money and fix and flip loans. In case you are planning to flip a property and wondering which one of these options will work for you, then it’s time to continue reading because I’m going to make a comparison of Hard money vs Fix and Flip loans so that it becomes easy for you to pick a strategy that yields more profit.
So, let’s get started:
What are Hard Money Loans?
It is a short-term asset-based loan secured by the property itself. It is a popular financial instrument for borrowers. Hard money lenders could be private investors or companies focusing more on the property’s value and less on the borrower’s creditworthiness. So, this loan is easy to obtain for borrowers with low credit scores. Besides, it is easy to obtain when compared with traditional bank loans.
What are Fix and Flip Loans?
These are specifically designed loans for real estate investors planning to purchase, renovate, and sell a property for a profit. These loans’ terms and conditions are tailored to specific requirements and needs of fix and flip projects.
Hard Money Loans vs Fix and Flip Loans
Now, let’s compare hard money loans and fix and flip loans in terms of profitability:
- Interest Rates and Costs
- Loan Terms
- Loan To Value Ratio
- Profit Potential
- Risk Management
1. Interest Rates and Costs
Expect to pay a higher interest rate on hard money loans than fix and flip loans. The interest rate for hard money financing can range from 8% to 16% or even higher. Besides, you will pay high upfront fees and closing costs for the hard money loans. Contrary to this, you pay a slightly lower interest rate with fix and flip financing. It is a cost-effective option for investors who want to pay reasonable upfront costs.
2. Loan Terms
A hard money loan term ranges from six months to two years. This term is shorter than fix and flip loans, designed per the timeline of fix and flip projects. Real estate investors feel pressure with hard money loans as they have short-term to repay all the money. Indeed, the fix-flip option gives them peace of mind as the term for this financing ranges from six months to 18 months or even more. So, it allows the investor to buy, renovate and sell the project based on a timeline. No need to rush for selling or renovations.
3. Loan-to-Value (LTV) Ratio
Hard money lenders may offer LTV ratios ranging from 50% to 60% of the property’s after-repair value (ARV). This means investors often need to provide a substantial down payment.
Fix and flip lenders may offer higher LTV ratios, often up to 85% of the ARV. This can be advantageous for investors who have limited capital to invest upfront.
4. Profit Potential
Real estate investors can make the most of hard money loans only when the property appreciates at a very high rate or when they can flip the project quickly. But if they fail to complete this project within terms of hard money loans, profit is offset due to the high-interest rate and associated cost of the loan.
Fix and flip loans are designed by keeping in the timeline of the project and the profit potential of the real estate investor. The low interest rate and high LTV leave significant profit margins for investors.
5. Risk Management
An investor can’t manage risk well with a short-term hard money loan as the term is short and the cost is high. In case investors fail to sell the property at the desired price, then profit is impacted to a great extent. Contrary to this, investors can manage risk effectively with fixed and flip loans adaptable to changing market conditions.
Conclusion
Investors can earn high profits from hard money loans when they are experts and are flipping a suitable property during favorable market conditions. However, this option becomes unprofitable when they fail to sell a property on time. Investors who want to maximize their profits in the fix-and-flip real estate niche should consider getting fix-and-flip loans. They offer lower cost, more favorable terms and higher profit potential comparatively. But again, you need to evaluate your specific project and financial condition before picking the best financial strategy for your investment.
