Real estate flipping is nothing new. It has long been a way for motivated investors to turn a small amount of capital into larger sums by purchasing rundown properties, fixing them up, and selling them for a profit.

Fix and flip operations generally consists of a person or people who are familiar with real estate and construction. This way these investors know which houses to target with the most potential for gain and which upgrades to undertake that can be completed quickly and at little cost in order to maximize profit. That said, there is another important factor to consider: loans.

Most people don’t have the cash on hand to purchase an investment property outright. At least in the beginning, they need banks or hard money lenders in California, New York, or Florida to help them finance home purchases.

Before you start taking out loans willy-nilly, however, you have to make sure your investment is going to pay off so you aren’t saddled with debt you can’t hope to pay off. Here are just a few things you should know about fix and flip lending before you take the money.

Types of Loans

If you’re interested in purchasing a home with the intention of flipping it, there are a couple of different types of funding to consider. First is the traditional bank loan. If you have a good credit score, reliable income, and enough money down, this is probably the way to go since it will present the best terms for repayment (low interest, long-term contract, etc.).

However, not everyone has the best credit to start with, especially following the recession. In this case you may want to look into alternatives such as hard money/private money lenders in California or New York, or even the prospect of real estate crowdfunding.

It’s almost impossible to secure home loans with bad credit. If you’re not top tier, it’s worth it to look into other options. Since crowdfunding for real estate investments is still in relative infancy and it can be difficult to arrange, your best bet is to consider hard money lending.  There are several benefits you can gain from going this route.

Benefits of Hard Money Loans

As noted above, hard money loans don’t necessarily require a good credit score. In fact, if you’re interested in buying a home with bad credit in order to fix and flip it for profit, hard money lending is likely to completely disregard your credit rating in favor of other factors.

For example, if your credit is poor but you carry relatively little debt (under 35%, say), you’re a good candidate for hard money loans. You also need to prepare a plan that details how you’re going to proceed and make money with your fix and flip. Private money loans are generally short-term so you need to explain how you’re going to show a return on investment quickly, say in about a year.

The good news is that most house flips are accomplished in just a few short months, which is why hard money lending is ideal for such ventures. Although interest rates for hard money loans will almost certainly exceed traditional bank loans, the fact that you will ideally repay the loan in just a few months means you’ll pay very little in interest. In addition, you can get approved for a hard money loan in as little as a few days, with no credit check required, supposing you meet other criteria.

Your Responsibility

There are very few situations in life where you can get something for nothing, and this principle applies to hard money lending. The main catch here is that you must come up with some measure of capital to invest in your own project. When you approach hard money lenders with a plan to purchase a home, fix it, and flip it in short order, they’ll not only want to confirm your planned timeline, but they’ll need to see that you’re invested (financially) in the outcome.

Generally, you can only count on financing for about 65-75% of the value of the property in question, which means you’re on the hook for the other 25-35% of the purchase price (unlike home loans where you may only have to come up with as little as about 3% up to as much as 20% for a down payment).