Fix and Flip Loan: 7 Steps To Kick-Start Funding

So you’re thinking about getting into house flipping? Flipping houses can be a great way to earn money in real estate investing you know the right way to do it. But financing those flip projects isn’t always easy, especially if you’re just starting out. That’s where fix and flip loans come in handy.

These specialized loans are for investors looking to buy, renovate, and sell investment properties for a profit. They provide the financing you need to purchase and repair a home before selling it. But it’s not easy money, fix and flip loans usually come with higher interest rates and fees compared to conventional mortgages. You also need to find distressed properties with potential and have a plan to fix them up and sell them quickly.

Still, if you’re able to find the right deal and execute your renovation and sales strategy, you can make good returns with fix and flip loans. Just make sure you know what you’re getting into – the rehab costs, timeline, target selling price, and other numbers need to make sense. I’ll break down everything you need to know to see if fix and flip loans are a good financing solution for your investment property flipping ambitions.

TL;DR

• Fix and flip loans provide short-term financing for buying, renovating, and reselling properties.
• These loans have shorter terms (6-18 months) and higher interest rates (8-15%).
• Underestimating rehab costs or overpaying properties can be costly mistakes in fix and flip.

What Are Fix and Flip Loans?

A fix-and-flip loan provides a short-term financing option for investors purchasing and renovating houses, to then resell them for a profit. These loans provide quick access to capital that investors can use to fund a flip project’s purchase and rehab costs.

Lenders typically structure fix and flip loans as bridge loans, intending the loan to “bridge the gap” between buying a property and selling it for a gain shortly after completing repairs. This type of financing allows investors to move swiftly to acquire good deals and maximize short turnaround flips.

Fix and Flip vs. Traditional Home Loans

Fix and flip loans are structured differently than conventional mortgages. Fix and flip loans typically have much shorter 6-18 month terms compared to 15-30 years for standard mortgages. Their interest rates are also higher, in the 8-15% range versus 3-6% currently for conventional home loans.

Approval depends more on the financials of the deal rather than borrower details. And the loans are repaid via resale instead of gradual amortization over decades like a 30-year mortgage. These reflect the short-term, profit-focused nature of the fix-and-flip projects.

Fix and Flip vs. Construction Loans

There are also notable differences between fixed and flip loans and construction loans. Fix and flips require less permitting, fund fully at closing rather than providing draws over time, and have shorter 6-18 month terms fitting their quicker rehab timelines.

Fix and flip loans also secure the purchase property itself, while construction loans secure the land that building is using for new construction. The criteria reflect the less complex renovations of existing structures with fixes and flips compared to new construction.

How Do Fix and Flip Loans Work?

The step-by-step process of securing and utilizing a fix and flip loan generally goes as follows:

1. Find an investment property ideal for flipping

The first step is identifying a property with the potential for profitable flipping. This is often a distressed or outdated house priced well below market value.

Research the comparable home sales and current market conditions to estimate repair costs and expected resale value after renovations. Location, lot size, square footage, and layout are all important factors to consider when evaluating a property’s flipping potential.

2. Apply for a fix and flip loan

Once you find an ideal flip property, apply to lenders that offer fix and flip financing. Provide the property address, purchase price, estimated rehab budget, proposed timeline, and exit strategy.

Many lenders will want to review the purchase contract terms as well. Be prepared to show experience with previous flips, contractor relationships, and evidence of sufficient capital.

A good option here loans from Lima One — they are specifically focused on investment properties and can provide loans in most states across the US.

3. Get approved for the loan

The lender will do their due diligence evaluating all aspects of the deal – purchase price, rehab budget, timeline, exit strategy, market data, and investor experience. Most fix-and-flip lenders can quickly approve loans, often within days or weeks. Loan terms typically range from 6-18 months.

4. Close on the purchase

After getting loan approval, move forward with finalizing the purchase transaction. 

You can then use the fix and flip loan proceeds for the down payment, rehab costs, and all other acquisition expenses. Closings happen rapidly since hard money lenders know that timelines are short — you have to move fast! 🚀

5. Complete renovations

Now that you have a hard money loan, start renovations by hiring contractors and subcontractors to remodel, repair, and upgrade the property. Work closely with the project team to stay within the planned rehab budget and finish on schedule.

Make sure that all improvements align with the property analysis and projected resale value. Don’t go overboard on costs or remodel if you won’t get your investment back for the specific property.

6. List and sell the flip

Once fully renovated, list the property for sale. Typically, a real estate agent lists the flip on the market and the buyer uses traditional financial institutions to make the purchase.

7. Pay off the loan

Finally, once the flip sells, pay back the fixed and flip loan balance along with any accrued interest and fees. After repaying the lender, the investor keeps the remaining net profit from the successful flip.

Pros and Cons of Fix and Flip Loans

Fix and flip loans offer benefits for this real estate investing strategy but also have potential drawbacks to consider.

Pros

• Fast access to capital – Fix and flip lenders can approve financing and fund loans very rapidly, often within just days or weeks. This speed is important for real estate investors to take advantage on time-sensitive discounted purchase opportunities and beat competing offers.

• Don’t need perfect credit – These loans focus more heavily on the deal’s merits – purchase price, rehab budget, exit strategy – rather than just the borrower’s credit scores. It means that you have to have a good deal or opportunity.

• Interest payment deductions– The interest portion paid on fix and flip loans is tax deductible, which can provide sizable tax savings. You can deduct costs for materials, labor, fees, and other rehab expenses to lower taxable flip income.

Cons

• Higher interest rates – Interest rates on these loans are typically much higher than conventional mortgages, ranging from 8% on the low end to 15% or more for higher-risk loans with shorter repayment terms.

• Risk of cost overruns – Actual renovation costs can go beyond your initial budget, especially in hot real estate markets where contractor prices keep going up. This eats into projected profit margins on flips. A tip is to be conservative in your cost projections.

• Strict loan terms – Fix and flip loans often have relatively inflexible requirements regarding completion deadlines, draw schedules for accessing funds, and hefty fees or penalties for defaulting or extending the loan. Investors must read the fine print carefully.

Types of Fix and Flip Loans

When exploring funding options for flip projects, an investor can look into several different financing options:

Hard money loan

Hard money loans from private lenders, like companies or high-net-worth individuals, are secured by the actual real estate as collateral. When searching for a hard money lender, Lima One Capital and New Silver are two options worth considering.

Lima One specializes in alternative financing for real estate investors looking to flip or rehab properties. They offer products like bridge, rental, and fix and flip loans with quick approvals and funding. While their rates are higher than traditional loans, they may be more competitive than other hard money lenders.

New Silver provides an interesting alternative by offering financing based on future revenue sharing instead of fixed repayments. For real estate investors with an operating business, this flexible option allows you to access capital without equity dilution. You repay a percentage of revenue rather than a set interest rate.

Home equity loans/HELOCs

Existing homeowners can tap into available equity in their current home through second mortgages or home equity lines of credit. These typically have lower interest rates but limits on the total accessible equity amount.

401(k) loans

Investors can borrow against their own retirement savings from a 401(k) account up to 50% of the balance or $50,000. 401(k) loans must be repaid quickly, often within five years, to avoid penalties but are relatively easy to qualify for.

Personal loans

Unsecured personal loans are based primarily on the applicant’s creditworthiness rather than collateral. They offer more flexibility but lower maximum loan amounts around $40,000 – $50,000.

Crowdfunded loans

Raising loan capital by pooling money from many individual crowdfunding investors.

Business lines of credit

Revolving credit lines meant for real estate investment businesses. Flexible but often requires showing a strong business credit history.

Bank loans

Some local community banks provide specialized fix and flip loan products. More stringent qualification requirements than private lenders but better interest rates around 8-12%.

Seller financing

The seller provides direct financing as part of the purchase agreement. While there are fewer qualifying requirements, negotiating favorable seller-financed terms can be very difficult.

Tips for Getting Approved

If you are seeking to fix and flip financing, here are some tips that can help get your loan approved:

1. Have a solid business plan: Provide a detailed and realistic business plan showing your cost projections, accurate contractor estimates, reasonable rehab timelines, and expected profit margins. If you have past experience successfully flipping houses or doing renovations this helps.

2. Find the right lender: Find lenders like Lima One who are knowledgeable about and actively provide funding for fixes and flips in your local market. Look for flexibility on loan terms, interest rates, fees, and the pace of capital drawn from the loan.

3. Know your exit strategy: Have a realistic, low-risk plan for how you will quickly sell the property once renovated. Show market data on recent sales of comparable upgraded properties to support the projected value.

4. Factor in holding costs: Make sure to account for mortgage payments, property taxes, insurance, utilities, maintenance, and other ongoing costs tied to the property during the renovation period. These can add up and eat into profits if you don’t budget for them.

5. Highlight strengths: Emphasize any strengths like construction experience, good personal credit, access to other capital, and established contractor relationships that help offset any red flags or weaknesses in your application.

6. Bring equity to the table: Putting up some of your own cash or using an asset like a home equity line as collateral shows commitment to the deal and can help get marginal loans approved. Even 10-20% as a down payment or skin in the game helps.

Mistakes to Avoid

Fixes and flip investors often run into issues that can compromise the success of their projects:

• Underestimating rehab costs – Repair expenses, contractor labor, and upgrade costs inevitably end up higher than initially budgeted. Always pad estimates by at least 10-20% to account for unexpected overages.

• Overpaying for properties – Getting emotional and buying flip properties above true underlying market value leaves very little room for profit when it comes time to sell. Stick strictly to the numbers and avoid overpaying.

• Not accounting for delays – Build enough time into projected timelines to accommodate permitting issues, contractor delays, HOA approval processes, inspection scheduling, and other hiccups that can unpredictably arise.

• Poor planning/project management – Disorganization and lack of oversight during the renovation process can easily wreck budgets. Carefully vet, manage, and audit contractors to prevent cost overruns or quality issues.

• Ignoring holding costs – Forgetting to account for mortgage payments, property taxes, insurance, utilities, and other costs tied to the property during the flip can lead to unexpected cash flow issues.

• Lack of buffers – Not building adequate reserves or contingencies for the unexpected, whether rehab budget overages or extending listing and sales timelines, is asking for financial trouble.

Conclusion

Fix and flip loans provide real estate investors with fast, fairly accessible funding to purchase and renovate houses for a profit. While interest rates are higher, the speed and flexibility of these loans enable investors to quickly capitalize on promising flip deals.

But you should be aware of the risks involved and create detailed, conservative plans showing how the property will be improved and sold within a short timeframe. Using fix-and-flip loans successfully takes careful financial projections and contractor management.

With the right preparation and approach, fix and flip loans can give investors the financing power to execute profitable house-flipping projects. These loans open doors for investors who can quickly find discounted properties and transform them for a bigger gain.

Fix and Flip Loan: Everything You Need To Know FAQs

Is it legal to flip a loan?

Flipping a loan is legal as long as you make proper disclosure and follow applicable laws and regulations. Inform lenders that you will flip the property

What credit score do you need for a fix and a flip loan?

You typically need a credit score of at least 600 to qualify for a fix and flip loan. Some lenders may approve borrowers with a credit score in the 500-599 range but with higher fees.

What is the house Flipper 70% rule?

The house flipper 70% rule means your maximum purchase price should be no more than 70% of the expected after-repair value of the property. This allows for enough profit margin after rehab costs.