If you’re looking to invest in real estate, fixing and flipping properties might appeal to you. Through fixing and flipping properties, real estate investors buy a home, renovate it, and sell it for a profit. However, purchasing a home can be expensive, even if the house is outdated and needs extensive repairs. To help you get started, you can look into fix and flip loans.
Fix and flip financing can give you the capital you need upfront to purchase and renovate a property. This guide will cover fix and flip loans for beginners, so you can better understand the eligibility requirements, benefits, drawbacks, and more.
How Does a Fix and Flip Loan Work?
For those interested in breaking into the house-flipping business—whether it’s flipping houses on the side or turning it into a full-on business—you don’t always need a full bank account. Fix and flip loans can help give you the capital you need to purchase and renovate homes and turn them into profit. Fix and flip funding can come in several ways, such as a line of credit or a conventional loan, and the one you choose depends on factors like your loan size, property size, and more.
So, how does fix and flip financing work? Typically, house flippers will get approved for a loan based on their loan-to-value (LTV) ratio. A loan-to-value ratio is a financial ratio that compares the amount of money you’re borrowing to the property’s market price. High LTVs indicate a higher risk, which means that loans will often come with a higher interest rate due to the possibility of the borrower defaulting on the loan.
In most cases, fix and flip loans will come with an 80%-90% LTV. So, for example, if you purchase a property for $200,000 with an LTV of 85%, the lender will lend $170,000, and you, the borrower, will be responsible for the remaining $30,000, which will be the down payment.
The amount you’re approved for on a fix and flip loan can also be based on the property’s after-repair value (ARV). Unlike the loan-to-value ratio, which is based on the home’s market price, ARV takes in the property’s estimated market value after repairs are done. So, if an appraiser estimates a home will be worth $250,000 after repairs, your lender can offer an 80% ARV and approve you for a $200,000 fix and flip loan.
However, in some cases, you can find fix and flip loans with no money down. While these can be more difficult to come by, you can find private investors or hard money lenders that offer fix and flip loans with no down payment.
Types of Fix and Flip Financing
When it comes to fix and flip funding, there are various loan types you can apply for. Below are some of the most common types of fix and flip financing.
Hard Money Loans
Hard money loans are one of the most common fix and flip loans. Hard money loans come from private business investors, not banks, and offer flexible qualification criteria and fast approval times—typically within one or two weeks. This makes it easy for house flippers to get the funding they need when properties are up for grabs, especially in competitive scenarios like real estate auctions and foreclosure properties.
Hard money loans can be an excellent option for borrowers with poor credit or those who need help getting approved for other forms of financing. Typically, hard money loans must be repaid between six months and three years, depending on your contract, and can come with high-interest rates.
Home Equity Lines of Credit (HELOC)
Another form of fix and flip financing is home equity lines of credit or HELOCs. A HELOC is based on a borrower’s equity in their residence, meaning you can use your personal assets to help fund your fix and flip venture.
When you make payments on your home’s mortgage, you start building home equity. It can be viewed as the difference between your home’s value and how much left you owe on your mortgage. So, if your home is appraised at $400,000 and you have a $150,000 mortgage, you have $250,000 in equity. With a HELOC, you can get a line of credit that can be used for anything, whether it’s repairing your own home or purchasing an investment property. Your line of credit will have a credit limit; in this example, that limit is $250,000.
HELOCs typically have to be repaid anywhere between 10 and 20 years and often require borrowers to have at least 15% equity in their home.
Business Lines of Credit
You can apply for a business line of credit if you don’t want to use your residence as collateral as you would with a home equity line of credit. With a business line of credit, you can have a lien placed against your business assets should you fail to repay the credit used. Business lines of credit are similar to HELOCs in that you can get a credit line that you can draw from during the renovation process, making it easy to afford materials and labor as you make repairs.
Personal Loans
Personal loans are another fix and flip funding option. Unlike business loans, personal loans often have lower limits, such as $50,000. However, personal loans often have competitive interest rates and repayment periods between one and seven years. Personal loans can be an excellent option for those who might not qualify for business loans, such as those just starting their own house-flipping business. After approval, you’ll receive a lump sum that you can use to purchase or make renovations on a home.
Rollover as a Business Startup (ROBS)
In some cases, your retirement plan, such as your 401(k), will allow you to use the funds in your retirement plan for business purposes, such as a fix and flip business. While this method is not recommended for those nearing retirement, it can be a good option for younger investors looking to get started in the fix and flip business.
With 401(k) financing, you could be approved for a loan of up to 50% of $50,000 that can be used for business purposes. However, one of the main drawbacks of this method is that it can put your retirement savings at risk if your flip is unsuccessful.
Bridge Loan
If you need funding quickly to secure a property and want to look for financing later, you can explore bridge loans. As the name implies, bridge loans act as a bridge between covering the cost of the down payment and finding financing to fund the rest of the flip. Bridge loans are often easier to qualify for, as they use collateral to back the loan. Bridge loans can be great for those who found a property that might sell fast but need more funding upfront.
Tips For Getting a Fix and Flip Loan
If you want to start house flipping, there are a few key tips to keep in mind to get approved for a fix and flip loan, including:
Research various lenders
Understand how much financing you need
Determine your qualifications
Compare various fix and flip loans
Improve your credit
Where to Get a Fix and Flip Loan
Because there are various types of fix and flip loans, there are several places you can get one. Traditional loans can come from banks, while hard money loans can be found by private investors and groups. You can also find fix and flip loans from online investors that support startups. To get the best fix and flip financing, explore various options and compare the terms, interest rates, and more.
Advantages of a Fix and Flip Loan
There are several key advantages of fix and flip funding, including:
Quick funding
Flexible terms
Free up cash flow
Compete against other investors
Disadvantages of a Fix and Flip Loan
While there are several advantages of fix and flip loans, there are also disadvantages you need to weigh, such as:
Potential difficulty getting approved
High-interest rates for certain loan types, such as hard money loans
Short loan terms that can be difficult to repay
Interested in House Flipping?
One of the best ways to find properties below market value is at online auction sites like ServiceLink Auction. At ServiceLink Auction, you can discover pre-foreclosure, foreclosure, bank-owned, and short-sale properties. These properties often need renovations and can produce a great return on investment. Contact us today to learn more about our upcoming auctions.