What is a fix and flip loan?
One of the most popular investment strategies in today’s real estate market is house flipping, also known as “fix and flip”. Investors locate properties that are in need of repairs, upgrades or remodeling but carry a great resale potential. They purchase the property and either perform the work themselves or contract with local professionals for the renovations, then turn the properties back to the market for a healthy profit after repairs are completed.
Financing Fix and Flip Investments
The biggest challenge to most fix and flip investors is obtaining financing. Real estate costs money, even parcels that are in need of substantial work. Unless you’re a well-funded investor with a large cash reserve, you’ll need to obtain some kind of loan. Fortunately, as this market has grown, so have the options for financing. Here are some of the most common fix and flip money sources, and some specifics to help you decide which type best suits your situation.
1) Rehab “Hard-money” Loans
Rehab loans, also called hard-money loans, are short term, high-interest loans specifically designed for fix and flip style real estate transactions. Most hard-money loans are for a term of one to five years, just long enough to purchase and facilitate repairs on a property. Issued typically by private lenders, they tend to cost more than traditional bank loans but are easier and much quicker to obtain. The property itself serves as collateral for the loan, so the value of the property is more important to the lender than the borrower’s financial condition. Loans are usually limited to around 75% of the property value, so a substantial down payment is often also required.
Pros: Easier to qualify. Faster funding. Widely available from a variety of sources.
Cons: High interest. Short term. Up-front fees and down payments may be required.
2) Home Equity Refinance
If you have enough equity in your personal home, you may choose to refinance your home into a new loan and receive the equity in cash to use for your investments. This is a one-time transaction, however, so make sure you can obtain enough cash from the process to fulfill your fix and flip requirements. Since you are seeking traditional home financing, there are many low-cost options for refinancing from banks and other financial institutions offering long terms and low interest.
Pros: Low interest. Long-term solutions. Widely available from traditional sources. Cash is on-hand and ready to make your deals.
Cons: One-time refinancing. Higher resulting monthly house payment, whether the cash is active or idle.
3) Home Equity Loan
Similar to the home equity refinance, this option allows you to seek a separate second loan on your existing home, based on the amount of equity in the property. The loan can be obtained from any type of source including banks, financial institutions, and private investors. Terms may vary according to your personal financial situation.
Pros: Second mortgage loans are available from a variety of sources with flexible terms. Cash is on-hand and ready for purchases.
Cons: Terms may vary. Payments continue whether the money is active or idle.
4) Home Equity Line of Credit
A home equity line of credit is similar to the home equity loan, but instead, it is a flexible term line of credit based on your home’s equity. Interest and payment only exist when the money is in use, and cease when repayment is made. The line of credit remains available for use as needed for the borrower and can be drawn upon at any time up to the maximum amount of the loan.
Pros: Flexible terms. Interest and payments only when in use. Credit is available and ready for investment purchases.
Cons: Terms may vary. Limited to a second mortgage based on equity values.
5) Investment Property Line of Credit
This line of credit is based on values of investment properties you already own and can be used as collateral. The line of credit amount is established and made available for investment transactions as needed. Interest rates are typically low, but a line of credit loans are usually short term, allowing for the purchase, repair, and sale of the investment property. This type of credit is typically provided by financial institutions and private investors.
Pros: Good for experienced investors who already own properties. Credit is always available and ready for property purchases.
Cons: Terms may vary. Short term solution for buying properties.
6) Bridge Loans
A bridge loan is a short, temporary solution for purchasing an investment property while your investment capital is tied up in another parcel. It provides very short-term cash to make the purchase while waiting for the other property to sell. Bridge loans are typically high interest and with a term of less than a year. The property being purchased is used as collateral, so the loan is generally based on the property value rather than the borrower’s credit.
Pros: Quick and easy solution for a fast purchase and quick turnaround.
Cons: High interest, very short-term loan.
Another popular source for investment financing is called “crowdfunding”. Crowdfunding is accomplished through national organizations that recruit a large number of independent investors. These organizations form a conglomerate source of funding for qualifying fix and flip borrowers. Their terms are varied according to the property being purchased as well as the financial status of the borrower.
Pros: Independent avenues of funding, outside many of the traditional sources.
Cons: Fairly high-interest rates. Typically short term loans.
Real estate is always a good investment, and fix and flip investors, if they shop wisely, can reap big profits and continually build up their ongoing assets. Sources of financing are available for nearly any kind of real estate investor, whether a newcomer to the field or an experienced house flipper. If you’re looking to get started, take time to study the financial markets and research the properties, and find that one sweet deal that will set you up on your feet. Take that step and start that journey to see your dreams fulfilled today.