Paint, carpet, tile, taxes, utilities, insurance – many things go into flipping a house. The list goes on and on. Whether you expected the expenses or otherwise, you want to be sure that you have enough capital to cover it all.
This is where fix and flip loans come in.
Keep reading below to learn everything that you’ll need to know to get started.
What Is a Fix and Flip Loan?
Fix and flip loans are a part of a larger category known as bridge loans. Fix and flip loans are a real estate investor’s tool to buy a home, improve it, and reintroduce it into the market.
These loans are short-term. They were designed to last until renovation on the house is complete and the property sells. Part of the profits from the sale will go to paying off the loan.
While a traditional home loan lasts between 15 and 30 years, a fix and flip loan usually lasts for 12 to 18 months. A traditional loan uses your personal credit and property as collateral, but a fix and flip only uses the real estate as collateral.
The process of purchasing a house with a fix and flip loan is similar to other types of financing a mortgage. You’ll still fill out an application, put forward documentation, and ask for an appraisal. You must also provide a detailed plan, including a timeline and a list of expected expenses.
When they approve your loan, you’ll fund the down payment. The lender will fund the rest of the amount, and you’ll close the deal on the house.
After closing the deal, you’ll provide the initial investment (materials, labor) along with the timeline you provided to the lender. You can then request a construction draw from your lender. This means after you’ve made the renovations, you can get reimbursement for that.
Why Shouldn’t I Get a Traditional Loan?
To start, a traditional loan takes somewhere between 45 to 90 days to appraise and close. This is a problem. If you’re trying to close a deal, a different buyer can get in there before you and secure the house.
Furthermore, a bank needs to know that you could pay the mortgage on the new property as well as your current home.
This looks to be a risky prospect for the lender. It’s difficult to prove that you can flip a house (especially as a beginner) and that you can pay both mortgages.
How Do I Get a Fix and Flip Loan?
This is an incredibly important question, as there are a few venues in which one would acquire a fix and flip loan.
Banks do offer fix and flip loans, but the process and requirements can be difficult. First off, you would need a great credit score along with proof of profit. This avenue is impossible for someone who hasn’t had the opportunity to build their credit or portfolio.
A bank doesn’t like the perceived risks of doing business with a first-time house flipper.
If you have bad credit, are a new investor, or are a beginner, the best route for you would be through a private lender. These lenders can have higher interest rates, but they can get the money to you much faster than a bank. Private lenders also offer you interest-only payments.
As mentioned above, your collateral through a private lender would be the real estate.
Private lenders base the amount of the loan on your new property’s after repair value (also known as ARV). For example, if the house you’re looking to buy is $45,000, but you think you can sell it for $90,000 after renovations. The lender would give you a high percentage of $90,000.
What Is a Hard Money Lender?
Hard money lenders are another type of private lender. They operate in a very similar way, except they also charge you “points”, which would be 1% of the loan amount.
Say the house you’re looking to flip is $40,000, but you can turn that house into an $80,000 value. This hard money lender is offering you $64,000 (80 percent of ARV), with an interest rate of 16 percent and 3 points. That means you would pay the lender 3 percent of $64,000 ($1,920), as well as interest ($10,240).
This avenue requires a good amount of careful financial planning. You still want to make a profit, but the interest rates (along with points) are high.
Is Crowdfunding a Good Method?
Another alternative avenue would be to use crowdfunding as a way to flip a home. There are many sites for this. On top of that, your family and friends could also be willing to help fund your project.
This is risky for you, the flipper, as it could possibly take much longer than alternative avenues. Also, interest rates and closing costs will vary depending on the website you use.
A Few Key Points
You, as the investor, will benefit from using a fix and flip loan – not only due to the quick financing. Your rates will be flexible and you can keep track of your progress through the submitted timeline. With interest-only payments, your costs will be low enough that you can keep focusing on renovations.
Be aware that closing costs will also vary depending on which lender you go with.
Also, by financing through an entity, your own personal assets are safe and sound. The only thing you would need to worry about is finishing your renovations in the allotted time.
Get Out There and Flip
Now that you know all about fix and flip loans and lenders, you’re ready to get started on flipping a house of your very own. So, if you have bad credit or don’t have enough money to start a project of your own, you now have the knowledge on how to begin.
With everything you’ve read here in mind, you’ll be selling your very own beautiful, renovated house in no time.
Get out there and live your house flipping dreams. If you’re looking for a great place to start, get in touch with us.
