I love all my nephews but there’s a particular place in my heart for Ryan, the youngest of my sister’s five sons. He’s always been smart, a good listener, and a quick learner. So, when Ryan told me he wanted to get involved with real estate investing, I couldn’t have been more thrilled. I loved the idea of taking Ryan under my wings and imparting all the real estate investing wisdom I’ve amassed over the years.
Ryan was like most real estate investors just starting out. He had a ton of questions, particularly about how to fund his purchases. He knew there were different lending products but wasn’t sure which one was right for him. He did say he liked the sound of a fix and flip line of credit. I told him that those are great—if you can get them. But that there are other options available for funding deals, too, that provide all the opportunity you need to get started in real estate.
Why a Fix and Flip Line of Credit Is an Attractive Option
A fix and flip line of credit can give you access to financing for buying and rehabbing properties. You borrow a predetermined amount of money—based on an assessment of your creditworthiness—from a bank or credit union. Then you draw down the cash as you go along. Unlike with hard money loans, good credit is essential. Fix and flip credit is used by both novice real estate investors and people like me who have been around the block a lot.
A fix and flip line of credit offers several attractive features. Here’s just a few:
Flexible investment options. You can use the funds to purchase a single investment property or even a portfolio of investment properties. Since the funding is already promised, you don’t need to pass each deal by the lender.
Lower cost. The terms of these loans will differ depending on which bank or credit union you work with but they do tend to have lower interest rates than other short term borrowing options available for real estate investors. And, you only pay interest on the money you actually use.
Renewability. Fix and flip lines of credit are credit-based, not asset-based. That means they aren’t tied to a specific deal or property like hard money loans are. So, once you’re finished paying it off for one deal, you can use it again for another without needing to take out a separate loan. Instead, you just keep borrowing the same money.
Fix and flip lines of credit may be cheaper than hard money loans, but they aren’t available to most people. Real estate investing can be risky and banks want to protect themselves, so they will lend to only the most creditworthy buyers. That means you have to have a high credit score and a low debt-to-income ratio. Real estate investors just starting out are typically shut out from this type of financing because of a lack of liquidity
There was no way Ryan was going to qualify for a fix and flip loan from a bank or credit union but he wasn’t deterred. He was a good listener and had heard me talk about hard money lenders in the past, so naturally, he asked about that lending option. Smart kid—they can be a great way to finance a budding real estate investment business.
Hard money lenders also provide short term financing for real estate investments but lend based on the value of the property—not your credit score. While they do they consider your experience level, this option remains more open to newer investors without impeccable credit.
Sure, you pay more in the beginning when borrowing through a hard money lender, but they become a viable partner as you grow your real estate investment business. They can provide quicker approvals and funding—which means more opportunities to purchase and rehab houses to sell. With enough hard money deals under your belt, you may even get the credit score you need for a fix and flip line of credit eventually.
Finding Funding Made Easier
Most real estate investors I know—myself included—start with hard money loans. I told Ryan that was probably his best bet as well. Find a good deal, connect with a lender, take care of business, then do it again. At this point, he leaned forward and asked an insightful question—how do you find a hard money lender?
I told him that becoming a HomeVestors® franchisee, like me, is the easiest way to build a relationship with several dependable hard money lenders working in the area. As a national real estate investing network, naturally, HomeVestors has solid relationships with the top lenders in the country. So, getting funding for my deals is easy.
Are you ready to find real answers to your real estate financing questions? Contact us today to learn how HomeVestors can help you gain access to some of the best hard money lenders.