Fix And Flip Loans: 6 Best Ways to Finance Your Fix and Flip Projects
Table of Content
- Hard Money Loans
- Private Money Lenders
- Crowdfunding Platforms
- Fix and Flip Cash-Out Refinance
- Home Equity Line of Credit (HELOC)
- Fix and Flip Investment Property Line of Credit
- Picking The Right Strategy
If you’re reading this, chances are you’re a fix and flipper who is looking at all kinds of financing options to kickstart your project. You might be a newcomer or perhaps even have years of experience in real estate. Nevertheless, it is always a good idea to understand and assess your options when it comes to getting a fix and flip loan.
Before we begin, let’s understand one thing: Fix and flippers do not have it easy. While TV shows like HGTV make fix and flipping seem all fun and exciting, there is a lot of research and analysis involved in flipping houses and making a lucrative career out of it.
Making thousands of dollars through fix and flipping as they show on the television is not unrealistic but at the same time, it isn’t easy. There’s a greater chance for you to lose all your money than to make a fortune flipping houses. However, if you choose the right strategy and make the right decisions, your fix and flipping business can skyrocket!
A fix and flip deal, if done successfully can take around 6 months to complete according to experts. Fix and flippers thus need to move quickly and acquire finances in a short period of time. Sitting on a property for long can hurt your business and reduce the profitability of the project.
Fix and flip loans can come through various sources but one important aspect of acquiring is to consider all the costs involved in flipping a house. This includes:
- The purchase price for the property
- Property taxes
- Insurance and maintenance cost
- Rehab and preparation cost
Having the right amount of capital to cover all these expenses is crucial for a fix and flipper. Despite the short amount of time fix and flippers have to raise money for the project, various options are present to help you pick the best financing strategy for your project.
As a first-time fix and flipper, you might not be able to secure a fix and flip loan the traditional way via government institutions or private banks without a good credit score or a successful financial track record. Banks tend to investigate your income level and your financial background before signing off on the paperwork. Without any experience, it is almost impossible to acquire capital from a traditional bank.
Whether you’re a first-time flipper or a seasoned professional, these financing options can ensure that your projects see the light of day and are successful. Let’s have a look:
Hard Money Loans
Hard money loans are a great alternative to traditional loans. Keeping in mind the needs of fix and flippers, hard money loans are relatively easy to acquire since borrowers do not need to showcase their credit score or past performance for it.
Hard money loans are asset-based loans. This simply means that your project for which you require financing becomes the deciding factor for a lender to finance you or not.
Hard money loans are also known as rehab loans since these are specialized short-term fix and flip loans meant for real estate investors looking for funding. Fix and flip investors can receive approval for hard money loans up to 90% of loan-to-cost (LTV) and 75% of after repair value (ARV) in as little as 15 days. This makes them one of the best options to acquire quick financing for their projects.
You might think what are hard money lenders getting out of such an arrangement where the risk for them is high. On the contrary, hard money lenders have nothing to lose even if borrowers default on loans. Since their focus is not on the borrower but the project that is being financed, should you fail to repay the loan, they get to acquire the property from you.
Due to their quick approval process and faster access to capital, hard money loans tend to have higher interest rates that circle around 7.5% — 15% on average. Being short-term loans, the loan terms usually last between 12 to 24 months.
Private Money Lenders
As opposed to institutional loans from government institutions or private banks, private money lenders are individuals who provide capital to fix and flippers. You might think what’s the difference between a hard money lender and a private money lender.
While it’s true that both these options include taking money from an individual, private money lenders tend to be more flexible with repayment options and tenure as they can set their own criteria for qualifying a borrower. This is because private money lenders generally involve individuals with whom you have a connection or a long-term relationship.
These could be friends, family, or business associates that you have known for years. Unlike hard money lenders, private money lenders do not necessarily advertise their service as they tend to lend money only to those they know personally.
Therefore, in order to secure your fix and flip loan through private money lending, you ought to build a relationship with lenders.
Crowdfunding Platforms
Crowdfunding platforms have recently increased in numbers ever since the JOBS Act of 2012 was passed. With the rise of multiple platforms on the internet that provide financing for real estate projects, many real estate investors prefer acquiring capital through crowdfunding.
However, crowdfunding platforms also have certain criteria that need to be met before you can showcase your projects and acquire financing. Most platforms look at the volume of your project as well as your overall experience in real estate. High entry points on such platforms make it difficult for fix and flippers to acquire capital. However, this is changing rapidly.
Fix and Flip Cash-Out Refinance
A cash-out refinancing strategy is another successful means to acquire capital for fix and flip projects. However, this strategy is meant for experienced real estate investors who have successfully financed projects in the past.
Cash-out refinancing is for investors who are homeowners and can be a viable option for fix and flippers as it takes advantage of the equity you have built over time on your primary residence.
Using this equity and adding it to your existing mortgage, you can use the capital to successfully finance your fix and flip project. However, before using cash-out refinancing as a solution you need to assess whether you meet the standards for applying this strategy.
For cash-out refinance deals, you need to have:
- A credit score of 640
- A maximum of 45% of debt-to-income (DTI) ratio
- At least 30% equity in your current property
Meeting these standards ensures that you are not heading down the wrong path with your fix and flip project. Moreover, you need to calculate the closing costs associated with cash-out refinancing as well as any possible increases in interest on your first mortgage.
Home Equity Line of Credit (HELOC)
Home equity line of credit or HELOC is another successful financing strategy for fix and flippers who are homeowners. Under this model, you can take advantage of the equity you hold over your residence and use it to finance your fix and flip project.
In simpler terms, HELOC works like a credit card where the value you get is the value of your property. You can draw a certain amount of credit using HELOC and later pay an interest based on it. Approval time for HELOC financing takes between 45–60 days. The loan term for HELOC can last up to 30 years.
Interest rates on HELOC are not fixed which means that the market will dictate the rate and you might have to pay more or less depending on the environment. Research suggests that interest rates can average between 3.5% — 6.5%.
Fix and Flip Investment Property Line of Credit
Just like a home equity line of credit (HELOC), an investment property line of credit (LOC) is another means to acquire financing for fix and flip projects. However, unlike HELOC, a fix and flip investment property LOC is borrowed against a non-occupied property by the lender.
Since credit can only be borrowed on non-occupied properties, LOCs are short-term loans ranging between 18 to 24 months while approval can take up to 30 days. Credit for LOCs can either be drawn from a single property or an entire portfolio depending on your requirement.
Fix and flip investment property line of credit is ideal for fix and flippers who are looking for short-term loans for their projects. If you are someone who has a spare property that can be leveraged to draw capital then this strategy is perfect for you.
Picking The Right Strategy
For fix and flippers, there is no one perfect financing strategy that you can always rely on. As you grow your business and build more successful projects your financing needs would also evolve. Therefore picking the right financing strategy depends a lot on where you are in your real estate investing journey.
If you are an established real estate investor who has handled multiple successful projects then you obviously have a great credit score as well as financial background. Taking advantage of fair credit loans such as HELOC, and cash-out refinancing can be advantageous for your business requirements.
However, not everyone has the kind of capital or financial background to acquire loans through traditional routes. This doesn’t mean that SMBs or fix and flippers who are just starting out have to feel disheartened.
As an up-and-coming fix and flipper, you should ideally look for short-term loans that can be obtained without too much hassle. Partnering with hard money lenders and private money lenders is a great option for those who have a bad credit score or no prior projects to showcase.
What matters is your vision and the potential that your projects display. For fix and flippers, we recommend heading straight to the MAST platform as it offers a cheap and robust solution for all your financing requirements.
Not only can fix and flippers showcase their projects on the platform to attract capital but can also engage their investors and partners throughout their investment journey. With MAST you get to move your entire business online and pave the road to a successful real estate investment business.
