“Fix and Flip” Loans for Beginners 

Read Time: 10 minutes

A fix and flip loan offers short-term financing for someone trying to buy, renovate and resell property. These loans often come with higher interest rates and shorter repayment periods than standard mortgages. Ideally, they’re used for 12-18 month projects.

Pros and Cons of Fix and Flip Loans

Fix and flip loans can help you make good money. They often come with fewer restrictions and can be a quick way to get money for property investments. However, they can be highly risky with heavy financial burdens if you run into delays with construction or the resell process.

Advantages of Fix and Flip Loans

The biggest advantage is they allow you to get money quickly. This can come in handy if you’re trying to buy a house in a competitive market. It also helps if you’re deciding to bid on auctioned or foreclosed properties and need cash-on-hand. Traditional or conventional loans can take several weeks to process and involve more rigorous vetting procedures.

Fix and flip loans offer more flexibility for borrowers who are seeking a loan from a private lender or a hard money loan. Fix and flip loans can be available if you’re trying to get a loan but don’t qualify for a loan or meet specific credit score or previous work experience standards for traditional banks.

Disadvantages of Fix and Flip Loans

The biggest drawback of fix and flip loans is the short time period you have to pay it back. Usually fix and flip loans have much shorter loan terms, so your average monthly payment would be much higher than a traditional 30-year and even a 10-year loan. The interest rate on fix and flip loans is usually several points higher than traditional loans, which will also push loan payments higher.

So if you don’t complete the rehab on budget, or in the time frame laid out in your business plan, you could either default on the loan, or be responsible for paying off the loan from personal funds instead of money made off selling the property

Another issue with fix and flip loans is that they can be hard to get if you’re just starting out at real estate investment. Getting hard money loans or a line of credit takes years of proven experience and a business portfolio showing lenders you’re successful at house flipping.

While defaulting on a hard money loan or private lender loan may not lead to a seizure of your home and a major hit to your credit, it can come with legal repercussions. Hard money lenders sometimes can get court orders to garnish wages, or directly take money from your bank account through a bank account levy.

Types of Fix and Flip Loans

There are a range of short-term fix and flip loans available for those trying to rehab and resell a house.

Hard Money Loans

Hard money loans are non-bank loans typically offered by private or online business lenders. They tend to offer more flexible eligibility requirements than bank lenders and can provide you with a loan as quickly as one to two weeks. Keep in mind that, hard money loans tend to come with higher interest rates than loans offered by traditional banks.

Note: Hard Money lenders may require borrowers to have an LLC, partnership or corporation to receive loan approval.

Payment on hard money loans usually range from six months to three years. An advantage of hard money lenders is their prioritization of the property’s potential and if they think your business plan viable. Meaning lenders may lean toward loaning you money, or raising the amount you can borrow if they feel your business plan is strong, realistic and that the project will be successful. That becomes helpful when you’re starting out at house flipping and may not have the best credit.

Business Line of Credit

If you become an experienced house flipper, you can look into obtaining a business line of credit for a fix and flip loan. A business line of credit is when the bank provides a set amount of money that you can draw on as needed, paying interest only on what you use. It can come in handy on projects when you’re not certain about the project costs or duration.

Business lines of credit come in two forms: secured and unsecured. Secured often requires collateral, like property or assets. Unsecured does not require collateral. Lenders will look over your credit score, business history, and financial health to see if you’re eligible for unsecured lines of credit.

Both traditional and online lenders offer these lines of credit, but banks and credit unions typically have the most favorable rates and terms. To qualify for a business line of credit from a bank, you’ll need excellent credit, a strong track record in business, and robust financials.

Home Equity Loan/Home Equity Line of Credit HELOC

Home equity loans and lines of credit can provide low-interest funding for projects like house flipping, but they require homeownership and risk your personal finances.

A home equity loan (HEL) or home equity line of credit (HELOC) lets you borrow money based on your home’s value. A HEL provides a one-time lump sum, while a HELOC offers a credit line you can draw from as needed. To get either, you need at least 15% equity in your home, good credit, and enough income to cover your mortgage and the loan payments.

HELs typically have terms from five to 20 years, and HELOCs usually feature a time span where you can draw money (usually a 10-year draw period) followed by a 20-year repayment phase. The borrowing amount depends on your home’s value, the percentage the lender lets you borrow against it, and your remaining mortgage balance.

Private Lender

If you’re trying to get into the house-flipping business, you may want to start with a private lender. Basically, private lenders are people with substantial funds to lend you money. These lenders often offer better rates and terms than hard money lenders (HMLs) and may be more flexible in negotiating payment terms. Some may even opt to share in the profits instead of charging interest. It’s important to consult with a loan specialist when considering a private loan.

Private lenders can sometimes be found at local real estate events and usually secure the loan with a first-position lien on the property.

Private lenders can range from acquaintances, family members, friends or even internet-found entities. With many online lenders, borrowers often need a 10% to 20% down payment and a track record of successful flips.

Personal Loans

Another fix and flip loan option is a personal loan. You can take one out for your business, and can be used for a variety of reasons. They tend to come with competitive interest rates, with terms between one and seven years.

Personal loans tend to be capped around $100,000. Strong personal credit will help you qualify for this loan, but if you can’t make the payments or default, your credit will take a major hit.

401(k) Loans

If your retirement plan permits, you might consider using your 401(k) to fund a fix and flip project. This approach is generally more suitable for younger investors, not those nearing retirement. Most 401(k) plans, including those for self-employed individuals, allow loans up to 50% of your account balance or $50,000, whichever is lower. These loans typically need to be repaid within five years and don’t have penalties for early repayment.

While getting a 401(k) loan can be straightforward, it does come with significant risks. Using retirement funds for flipping projects endangers your future savings. For instance, if you change jobs, you may need to repay the loan immediately. Additionally, if your project fails, you risk losing that portion of your retirement savings. It’s crucial to carefully consider the potential benefits against these risks before opting for this financing method.

Crowdfunding

Crowdfunding is another way you can get a fix and flip loan. It’s a process usually involving many small investors, each contributing a portion of a loan and earning interest on their investment. Most crowdfunding loan processes include going online to find investors. There are specialized websites you can use that focus primarily on real estate/house-flipping fundraising. Some sites prefund loans with their own money for quicker closing, while others wait for investor funding, which can potentially slow the process.

Despite the potential benefits, some flippers avoid crowdfunding due to its slower deal evaluation and commitment process compared to private or hard money lenders. Additionally, unlike private lenders, crowdfunding platforms often have fixed terms for deals, offering less flexibility for negotiation as they manage obligations to numerous investors.

Fix and Flip Process

Fix and flip loans often come in the form of a term loan or a line of credit. Because they’re used for short-term projects, there are rarely prepayment penalties like what you may find with an adjusted-rate mortgage (ARM).

Fix and flip loans rely heavily on a few key formulas. They are loan-to-value ratio (LTV), loan-to-cost ratio (LTC), and after-repair value (ARV).

Loan-to-value (LTV) compares the loan amount to the property’s value, typically offering up to 90% financing; for instance, on a $250,000 property, a 90% LTV loan provides $225,000.

Loan-to-cost (LTC), on the other hand, relates the loan to the total project cost, including purchase and renovation, with lenders often going up to 90% of the total cost. So if the project will cost $300,000, with $50,000 being renovations and the property costing $250,000, a 75% LTC loan would be $225,000 (300,000 x .75).

After-repair value (ARV) is an estimate of the property’s value post-renovation; a 70% ARV loan would offer $140,000 on a property expected to be worth $200,000 after repairs.

How To Get a Fix and Flip Loan

Getting a fix and flip loan, especially if you’re a beginner, takes a lot of planning and research. First you need to come up with a project plan. That includes, but is not limited to, laying out how much money will be needed to buy the property and make renovations. A key part of the project plan also needs a schedule showing how long it will take to complete the project.

Note: Depending on how long the project is, figuring out how much things like property taxes and utilities will cost monthly during the project.

Next, you need to lay out what you will bring to the lender. If you’re just starting, that will likely require a strong credit score and fair amount of money toward a down payment. Once you get more accomplished at house flipping, lenders will look more toward your previous experiences and real estate business portfolio.

You also want to compare lending options. Shop around to see which lender will give you a loan term you like, the most competitive rates, and how much you can borrow. After shopping around, be sure to reach out to others who flip homes for advice on how to navigate the loan process and project execution.

Fix and Flip Refinance

Once you’ve received a fix and flip loan and completed your renovations, you may want to reconsider refinancing the fix and flip short-term loan to a long-term loan. Refinancing could be a way to get more money to start another fix and flip project while lowering the monthly debt burden on the now-finished property.

One option is a cash-out refinance. Typically people do this when trying the “Buy, Rehab, Rent, Refinance, Repeat (BRRRR) method. If you decide to make a property a rental investment, you could use this if you want to continue with rehab projects and need money. A HELOC on the recently completed property is another refinance option for a fix and flip loan.

Key Points

In summary, fix and flip loans offer promise when considering a career or investment opportunity in house-flipping and real estate rehabilitation. They often come with fewer obstacles in the beginning, with many focusing on getting money to the borrower quickly. However, the terms are usually much shorter, meaning interest rates and monthly payments are considerably higher than traditional loans.

Following through with one can be hard if you lack the experience needed to turn a profit on construction costs or if you struggle with reselling the property. It can also set you back financially if you have delays and have to dig into savings or reserve personal funds to pay off the loan.

Consulting with a loan specialist should be a key part of your planning process before applying for a fix and flip loan.

Kirk Haverkamp

Kirk Haverkamp is an award-winning reporter and editor with more than 25 years of experience in journalism and public relations. He has contributed to Credit.com, Investopedia, and MetroMode online magazines, among other work. He has a B.A. in English from Hope College and a Master’s Degree in journalism from Michigan State University.

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