Flipping homes for a living has gotten a lot more attention in the last few years. Thanks to HGTV, there’s a much broader appeal to purchasing homes with the intent to renovate quickly and sell for a profit.
If you’re doing this successfully, it might lead to multiple flips at once. Like most things in life, the biggest limiting factors are time and money. You can tackle the time challenge by not waiting for a flip to finish and sell before beginning another one.
But what about the challenge of money? If you’re managing multiple flips at once, you’re going to need cash to buy more properties to flip. This is the time to make sure you know your options.
I want to pause here to introduce myself. I’m Phil, and I write for A Nightmare on Loan Street Blog. This blog has a focus on alternative lending, and how to avoid some real nightmare scenarios when it comes to securing a loan. Nightmares like “oh crap, I want to buy that house at auction but I don’t want a hard money loan”. Let’s talk more about that…
Option 1: Hard Money Loan
Hard money loans offer cash fast. Lenders look at the value of the home after the renovations you plan to make to gauge your ability to repay the loan. Hard money loans typically have a higher interest rate (7-9% as a good starting point), upfront fees, and a short timeframe (as little as 3 months or sometimes up to a year).
Option 2: Soft Money Loan
Soft money loans are a type of bridge loan where the loan is based on the borrower’s ability to repay the loan. These loans look at a borrower’s credit score, and often take into account the Debt Service Coverage Ratio (DSCR). The DSCR measures a borrower’s ability to repay a loan. This is a really helpful metric that you can calculate - take your monthly net operating income and divide it by your monthly expenses. If the number is 1.25 or greater, this is a really favorable score that will show the lender that you have the cash to repay this loan. Check my full post on the DSCR here [link to post #10 Conventional Mortgage Alternative Debt-Service Coverage Ratio DSCR].
Is the nightmare of “oh crap, I want to buy that house at auction but I don’t want a hard money loan” turning into a more pleasant dream of “there’s another way I can keep more cash on hand and still meet my goals of buying that property”? I hope so. That’s kind of the point of this blog post, friend.
So why would someone choose a soft money loan over a hard money loan? One reason is liquidity. If you see yourself flipping 3 or more houses at once, and you know that gem on Magnolia Lane is going to hit the market, using the DSCR to secure the loan will keep more cash available for you to make the purchase. Even if there isn’t something immediately on the horizon, having the extra cash will give you the cushion to make those unexpected repairs or upgrades that pop up on the properties you’re already flipping. I’m not a home flipper, but I’ve seen Flip or Flop enough times to know that Tarek and Christina are going to get that call about a problem they didn’t expect. Having cash on hand will come in handy. Pun intended.
This isn’t to say that hard money loans are bad in any way. But sometimes flippers are so focused on what they do best (#fixingupMagnoliaLane), that they get tunnel vision when it comes to loans. I’m hoping that today’s blog post helped you realize that there is another option.
If using the DSCR is something that interests you for your next loan, I’d give the team at Truss Financial Group a ring. They have some highly skilled mortgage advisors that can get you squared away. Now go get Magnolia!
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