Real estate investing is on the rise. Middle class entrepreneurs are finding opportunities to boost their income by investing in fix and flip (or fix and hold) real estate investments at an exciting rate.
What exactly is a flip?
Thanks to the success of several primetime television shows and the rebound of the US housing market, house flipping is on the mind of new and experienced real estate investors alike. These savvy investors find a distressed property that can be purchased at a discount, 26% below market value on average, with the goal of renovating the property and selling it for a profit or holding it for rental income.
Smaller investors are making money…
According to RealtyTrac’s 2015 US Home Flipping Report, residential property flipping is the most popular it has been since 2007; counting over 110,000 active flippers. Out of those 110,000 flippers last year, the average number of flips per investor was just 1.6–the lowest it has been in 8 years–a strong indicator that smaller investors are entering the market.
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Why the rise in new real estate investors? Quite simply, they are making money. According to the research, the average finished flip was appraised at 5% above market value and sold for an average gross profit of $55,000 if it wasn’t held long term for rental income.
But where do they get their money?
The first source of funding beginner investors try is their local neighborhood bank. Banks tend to offer lower interest rates than the alternatives, and some investors feel more comfortable using a federal institution. However, investors that are not exceptionally healthy with an outstanding profile have trouble getting the financing they need from banks for a few reasons.
First, institutional financing is almost impossible to obtain with a mediocre credit score and not a great deal of liquidity. Perhaps even more importantly, bank loans take time that investors usually do not have. Time is money when it comes to real estate investing, and a delay in funding almost always means the inability to snatch up that perfect listing and a missed opportunity.
Hard Money Lenders
The option most investors turn to for leverage then is what is known as hard money lending (or asset based lending). A hard money lender is willing to finance “riskier” loans for borrowers that don’t meet institutional criteria in exchange for higher interest rates.
As opposed to banks, hard money lenders are more interested in the deal itself rather than the profile of the borrower. These alternative lenders use different underwriting criteria that tend to offer significant leniency when it comes to credit scores, income history, and other traditional underwriting factors.
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Hard money lenders want to know that you’re getting involved in an investment that will be profitable–whether the goal is to sell quickly or hold and rent. Unlike conventional financing, these alternative lending firms were born out of necessity in the real estate investing market so their processes are designed to support those specific needs.
[bctt tweet=”Real Estate Investing: No Longer Just for the Wealthy”]
In addition to closing loans fast, hard money lenders help investors leverage their capital by financing some or all of the purchase price of a property as well as the renovation costs. As a hard money lender ourselves, we typically fund up to 80% of the purchase price and all of the rehab costs. This means in exchange for paying more money per month in interest, a borrower is able to get involved in a real estate transaction with just 20% of the purchase price coming out of their pocket. Investors looking to hold a property for rental income typically refinance out of the hard money loan with conventional financing once the property has been stabilized.
1. New investors are entering the real estate market at the highest rate in a decade.
2. The average fix and flip or fix and hold project is purchased at a steep discount and ultimately worth several percent above market value.
3. Individual investors that are not independently wealthy are leveraging alternative financing to fund investments with just a fraction of the deal out of pocket.
This blog was written by our special guest Eric Krattenstein, Chief Marketing Officer of Asset Based Lending. You can find more information about their services at http://www.abl1.net