Fix and Flip Loans: A Real Estate Investor’s Best Friend
Fix and flip loans solve an age-old real estate investing problem: getting the money to start buying and flipping houses.
Conventional loans aren’t great flip loans, and if you’ve ever tried to buy a flip house with traditional loans, you’ve experienced this firsthand.
Luckily, there are ways to secure financing for your flipping business, even if you’re a new investor learning how to flip houses.
This article will give you the low-down, dirty details of how fix and flip loans work, where to find them, and what you’ll need to get started.
What are Fix and Flip Loans?
Okay, so “fix and flip” refers to the process of buying a distressed or under-market value home, renovating it, and then selling it for a profit.
Fix and flip loans, then, are the means of funding the purchase of the home and renovations needed before resale.
Don’t confuse a fix and flip loan with a construction loan; though similar, construction loans are for new-built homes, not renovations.
It should also be said that fix and flip loans aren’t a single loan product – they’re more like a type of loan.
Common Types of Fix and Flip Loans
There are many ways to finance a fix and flip property, but I’ll list the most common strategies for convenience.
Editor’s note: Only one loan on this list requires a borrower to move into the property – the 203(k) loan –but this loan is fantastic for first-time flippers, so I’ve listed it as a bonus.
1. Private lending
You’ll sometimes see private lending referred to as OPM (Other People’s Money), and that is exactly what it is: borrowing money from private investors to finance a real estate purchase.
Private lending can be attained by working 1-on-1 with an investor or through peer-to-peer lending platforms like Funding Circle.
Many private lenders – doctors, lawyers, engineers, and other real estate investors – are looking to get in on an attractive fix and flip deal.
Pros
- A borrower can often negotiate “no money down” loan terms
- There usually aren’t any qualifications or applications needed
- You can get the total cost of your project funded – renovations and all
Cons
- Higher interest rates
- Short payback period
2. Family/Friend Loans
If you’re on good terms with your family or have friends interested in investing, they might be an excellent source for a loan.
On the one hand, you can help them do more with their hard-earned money than dump it in a savings account (spelled: money sink). On the other hand, they can help you quickly fund your next flip house.
This flip loan is probably the easiest to facilitate and – depending on your relationship – allows you to negotiate the best loan terms you’ll likely ever see.
Pros
- Existing network of individuals
- Potentially GREAT loan terms (no money down, near-zero interest owed, etc.)
- Funds are available almost instantly.
Cons
- Business complications can damage a relationship
- Loans might be taxable
3. HELOC or home equity loan
A HELOC (home equity line of credit) or a home equity loan are great ways to self-fund your next flip, especially if you’d like to avoid tampering with an existing mortgage.
Both flip loans are sides of the same coin but different enough that I’ll break them down individually.
3.1 HELOC
This type of loan allows a homeowner to tap into the equity they have in their home to secure a line of credit – like a credit card, but with better rates.
With a HELOC, you can borrow only as much as you need (to keep your monthly payment low) and use the money in whatever fashion you’d like (renovation costs, closing costs, etc.)
Pros
- Average APR is better than a hard money loan
- They sometimes have flexible repayment options
- Interest can be tax-deductible
- Easy access to funds
Cons
- Your home is used as collateral.
- Variable interest rates go up and down with the market.
3.2 Home equity loan
If you’ve owned your home –and made consistent payments on it – for a while, or your local housing market has seen a significant bump, a home equity loan could be the fix flip option you’re looking for.
In a nutshell, this loan is money borrowed against the equity you have in your home.
It sounds simple, but let’s break it down:
Let’s say you own a $100,000 home, but you only owe $50,000 on that home – you have 50% equity in the property.
Now, if your lender’s maximum LTV (Loan-to-Value) is 80% or .80, we can calculate your eligible loan amount using this equation:
$100,000 (your home’s value) x .80 (lender’s max LTV) = $80,000
$80,000 – $50,000 (your equity) = $30,000 is a rough estimate of what you’d be able to borrow.
Pros
- Lower interest rates than a personal loan or cash-out refinance
- Higher borrowing limits than other types of loan
- Fixed monthly payments (5-30 years)
Cons
- It takes longer to finalize and fund
- Has closing costs
4. Hard money loans
The term hard money might sound scary, but hard money loans and hard money lenders can be a real estate investor’s best friend.
Hard money loans are short-term loans (think 12-18 months) that require a lower minimum credit score and collateralize the property you’re buying, not one you already own.
Pros
- Borrowers will find that a hard money lender will be more willing to work with you to close deals.
- There are property types that a traditional lender won’t touch – distressed homes, for example– but a hard money lender will.
- When other flippers are on the prowl in your market, you need to move fast, and the average time to close a hard money loan is much faster than a traditional loan.
Cons
- Shorter loan terms
- Hard money lenders often want interest-only payments while the loan is outstanding.
5. Personal loan
A personal fix and flip loan can be a great option if an investor doesn’t need to borrow a large amount of money and already has good credit.
Personal loans often require only a simple online application to get approved and have competitive interest rates.
Some of these loans come with no prepayment penalty, so you won’t be penalized if you pay them off early.
Pros
- Flexible terms
- Competitive interest rates
- Lower monthly payments
Cons
- Small loan amounts (no more than $50,000)
- Short payback period (3 to 7 years typically)
6. Business Line of Credit
Commercial lines of credit can give an investor access to more significant limits than you’d see with the average flip loan program.
This loan is essentially an open credit line – much like a HELOC – but isn’t tied to your home equity.
A business line of credit is one of the few traditional loans that work well for real estate investors but will require a history of successful investments, cash in the bank, and stable revenue.
Pros
- Large credit limits
- Pay only for what you use
- Builds business credit
Cons
- Difficult to qualify for
- Extra fees
7. BONUS: 203(k) loan
The 203(k) is a little-known fix and flip loan that can help a borrower finance the purchase of the home and the renovation costs in one loan.
You’ll have some additional red tape because it is an FHA loan, but the benefit often outweighs the costs.
Pros
- Low down-payment
- Great interest rate
- Few restrictions on mortgage type (use it for both initial purchases or refinance)
Cons
- FHA loans require more up-front documentation and procedure (AKA, red tape)
- You are required to pay an ongoing FHA Mortgage Insurance Premium (or MIP)
How To Apply for a Fix and Flip Loan
Because fix and flip loans vary so wildly, it’s nearly impossible to lay out a simple step-by-step process a borrower should follow to get approved.
Instead, I’ll share some best practices you can refer to that hold true for every loan, everywhere.
Get your financial house in order
Cleaning up your finances is a good idea, whether you’re looking to get a fix and flip loan or just get a better grasp on your money habits.
Any private lender, hard money lender, or cash-heavy family member will want to see that you have your “head screwed on” before they consider letting you anywhere near the money they manage.
How to get your finances aligned with your investing goals:
- Start by creating a budget or updating an old one. Do this for both your personal and business expenses.
- Fix your credit. Not the easiest task, but it shouldn’t be seen as a barrier and will help you secure more attractive loans.
- Set your investing goals and start funneling resources toward those goals.
Have a business plan already in place
Successful flippers will approach each fix and flip project as its own business and plan accordingly.
You don’t have to try and account for every nut and bolt – which would be impossible – but you need a clear vision of how you’ll start and finish your project.
Here are six items you’ll want in your business plan before presenting it to a lender:
- Market analysis – state of the local housing market
- Property information – info on the home, neighborhood, and “comps”
- Scope of work – list of planned renovations, cost estimates, and timeline to completion
- Team list – info on contractors or employees helping with the project
- Appraisal – current valuation of the property before renovations
- Exit strategy – what you plan to do with the house after renovations
Shop Around
There isn’t a one-size-fits-all flip loan program, deal structure, or lender in this business, so you’d benefit from building a financing network.
Talk to bankers, private lenders, investors, wealthy family members, and friends – anyone who works in the industry or is interested in investing.
Be open with your goals, do your homework, and this network will help connect you with the financing you need.
P.S (I love this movie, The Gladiator. If you haven’t seen it, do yourself a favor and watch it).
Wrap Up
You should now understand what fix and flip loans are, how to get one, and how they help real estate investors grow their businesses.
If you’re ready to start shopping, check out my recommendations for the best fix and flip loans.
Good luck, and we’ll see you out there!
