Conventional v Hard Money Loan

[Mick Misra]

I'm planning my first fix & flip and have a question on whether I should use conventional or hard money lending. I hope all the BP'ers can give me a little advice on my first fix and flip! Basically, I'm in the process of lining up an equity investor. My thought is that equity can pay for the down payment. After that, I'll need more cash for the rehab costs. If I raise enough equity for the down payment and rehab, should I generally just stick to conventional financing for the rest of the purchase price? If I can only raise enough equity for the down payment, do I need hard money finance for the rehab amount or are there conventional loans for the rehab as well (taking into consideration this is my first fix and flip)? When should I use conventional finance and when should I use hard money? I know that, in general, conventional is best, but are there situations where hard money is the best (or perhaps only) option? Thanks in advance for your responses!!

[Jeff Rabinowitz]

I disagree that a conventional loan is always best for a flip. Presumably, you will only need the money for ~6 months. When you go conventional you are generally getting a longer term loan--years. You are paying for that privilege but you will not be using it. You will have a long approval process and pay for appraisals, origination fees, surveys, etc. You will have monthly payments. There may be a prepayment penalty also.

A private lender will have a higher rate but there may be much fewer fees (they may not require an appraisal and may not charge origination fees). Often no monthly payments will be needed nor will there be a prepayment penalty. A private lender may be willing to lend a smaller amount, in fact, they may prefer to do so. You will know whether your private lender will do the deal very quickly.

A hard money lender will have more fees than the private lender, perhaps a higher rate and a more involved application process. However, negotiating no payments and no prepayment penalty will probably be possible.

Estimate how much you will need and for how long you will need it. Estimate the costs and weigh the advantages and disadvantages of each type of financing. You may be surprised by what you find. The more experience you have the better rates and terms you will attract.