How to Understand Profit Margins on a Fix & Flip When Using a Bridge Loan
Sep 21, 2016
For the better part of the past decade, the real estate market has been energized by investors looking to capitalize on fixing and flipping real estate, which are undervalued and may be a proverbial diamond-in-the-rough. Popular cable shows like “Flip or Flop”, “Rehab Addict”, and “This Old House” highlights this investor niche within the real estate market. In most cases, properties that are ‘flipped’ have seen better days, have not been properly managed, or are more profitable being repurposed for a better use. Although these shows take a certain amount of creative liberty, many real estate investors do in fact find success in flipping properties.
Now, the question most people often ask is, “how do investors afford to pay for these properties?” Some real estate investors do have the financial capability to fund their property purchases outright. Others form real estate investment groups, where participants pool their money together in order to be able to make larger purchases. But many investors utilize hard money bridge lenders as their source of funds to close on a property purchase quickly.
With a reliable hard-money lender, here is how fix and flip real estate investors are able to afford purchasing an ‘undervalued’ property to flip.
Fix and Flip Hard Money Loan Scenario
A real estate investor is looking to purchase a three-unit investment property for $550,000. The property is current vacant, in need of significant work, and the seller is looking for a quick close. The investor estimates that it will take approximately 90 days to rehabilitate the property at a cost of an additional $75,000. The investor borrowed 65% of the property’s value from a Hard Money Lender at a 12% interest rate.
$550,000 – Price of real estate
$22,000 – Est. Closing Costs
$572,000 – Property Cost
+$75,000 – Est. Cost for Property Rehab
$647,000 – Total Property Costs
Debt and Debt Service:
$357,500 – Amount of hard money loan – 65% LTV
$10,725 – Debt Service @ 12% or $3,575/ mo. interest only.
$368,225 – Total Debt Repayment after 90 days
Sales Price for this 3-unit property:
$810,000 – In line with comparable sales
$810,000 – $647,000 (Property Cost) – $10,725 (Debt Service) = $152,275
In approximately three months, this investor will be able to realize a 23.1% return on investment. There are other known costs such as Hard Money Lender Fees, as well as unknown costs like additional holding time, and unforeseen additions to the rehab costs that an investor should consider. There is also the potential of significant changes in the real estate market that could affect sales prices. All of these variables should be factors and risks any real estate investor should account for in determining the viability of a property for investment.
Yes, hard-money loans do come with a higher cost of money than with traditional lenders. But when done right, using a hard money loan to fund a Fix-and-Flip real estate deal makes all the sense in the world. With the right property(ies) and with in-depth analysis of potential sale prices and costs, an investor can create higher returns that far outpace the return on investment other forms of investments offer.
Let Riverdale Funding Help You Secure a Commercial Hard Money Loan for Your Fix & Flip Property
Riverdale Funding can quickly provide you with a FREE evaluation and property value assessment. We also understand that when it comes to purchasing fix and flip properties, time is of the essence and a quick closing matters. Riverdale can get you closed in days, not weeks or months.
Contact Us today to get started. 888-368-4983