The financing of a fix and flip is a crucial step. It is usually the first step where you encounter problems, and the moment where you need the process to be quick, so your project does not slip through your fingers. Financing is a determining factor in the success or failure of your project. Since the goal of a real estate flipping is to complete the project as fast as possible to make a profit quickly, we will present the key elements of our interview with real estate financing specialist, Jocelyn Grégoire. Here are the details behind private and conventional funding, their respective benefits, and the way to use them efficiently.
The Benefits
Private funding has a lot of benefits when it comes to real estate flipping. First, private lenders know the field and how to do forecast calculations on the profitability of the project well. Moreover, since they know fix and flips well, they are aware that time can make or break a flip. Private lenders offer products that are tailored to real estate investments. Furthermore, the calculations are based on the future value instead of the current value of the project. They also offer short-term financing.
On the other hand, financial institutions specialize in long-term financing. They offer low interest rates and few monthly fees. As for real estate flipping, they need to follow the Canadian bank charter, which has a strict calculation method and does not take into account the after-repair value. The desired amount can be difficult to attain, and the down payment is often high.
| Private funding | Conventional funding |
| Knowledge of the real estate industry | Lower costs |
| Open to short-term financing | Lower interest rates |
| Calculations based on the future value of the project | |
| Low penalty fees for breach of mortgage | |
| Possibility of getting collateral mortgages on other assets |
The Financing Process
The flipper finds a project with a high potential. They prepare their presentation, calculate the future value, and develop their flipping strategies. They then present the project directly to the financing entity, whether it is conventional or private. Either way, the project must be ready, well-documented, and well-presented. We suggest that you send your documents digitally, and that they be perfectly organized. For instance, an organized and complete file could be settled within 24 to 48 hours, whereas a messy or incomplete file might be put aside and forgotten. Remember that the way you present your project reflects your management style and your personality as a manager. In the case of private funding, the financing offered for a fix and flip is projected over a short period of time, which means that the interest rates will be higher than regular mortgages in conventional institutions. This is why you should have pre-established exit plans for the 6 to 8 months following the loan.
Examples of Exit Plans
Ideally, you would sell your project before your planned deadline, which means the real estate investor would get their money back and could invest in another project. If the sale takes longer, you should consider refinancing with a financial institution. This way, you can use the new value of the project and the rent adjustments, which will make financing easier and give you a more advantageous interest rate. You could also live in your flip to lower your expenses and write off the costs. All you need to know is that it is better to anticipate these situations than to have to react quickly.
Tips to Start Your First Real Estate Project
Know your strengths and weaknesses in every aspect of the real estate field: negotiation, construction and renovation, design, financing, selling, etc. Learn more about these elements. Take advantage of coaching, sign up for training courses, and surround yourself with competent people. When it comes to financing, make your calculations and your projections, consider multiple scenarios, and consult professionals to help you choose the best options for your projects!
Visit https://www.facebook.com/GestionCedma/ in the “Events” tab for more information about the courses offered. You could discover a passion in private financing and start your career as a private lender.
