What Is a Fix and Flip Loan?

Many people choose to diversify their financial portfolios by investing in real estate. A common way to make money in real estate is to fix and flip distressed properties. Unless you choose to do fix and flips with your own cash, you may want to think about getting a fix and flip loan.

Why Fix and Flip Loans Are so Popular for Home Buying in 2024

fix and flip home loanA fix and flip loan is a type of short-term loan that is made to help investors buy and fix up distressed properties.

A fix and flip loan is sometimes referred to as a hard money loan, and usually has a higher interest rate of 10% to 15% for a six month or one year period.

Fix and flip loans are designed to give investors fast access to cash so they can buy undervalued homes or buildings, make key improvements, and sell them for a profit within a year.

Fix and flip loans are higher risk and more costly than regular mortgages, but they can be a valuable opportunity for real estate investors who want to make good profits.

How Fix and Flip Loans Work

Fix and flip loans are usually based on the ARV or after repair value of the property. If the loan provider thinks the upside of the distressed property is high enough, they may extend a fix and flip loan to the investor. If the investor doesn’t pay the loan, the loan provider will take over the property to recover some or all of the money they loaned.

A fix and flip loan typically requires the investor to put down at least 10% or 20% and pay monthly interest at 10% to 15%. Most fix and flip loans are paid off within six months to a year. But a few loan providers may offer fix and flip loans for up to 18 months.

Once the renovations are done on the property, the investor can sell the home at a profit and pay off the lender. Fix and flip loans are intended for experienced investors who are skilled at finding under market value properties and know how to renovate properties at a reasonable cost.

Kinds Of Fix and Flip Loans

The most important part of being successful with fix and flip loans is having an excellent plan for finding undervalued properties with potential. Second, you need to have a good team for renovating the property affordably in a way that will get the property sold, without overspending on rehab.

There are several types of fix and flip loans that you may choose from. Hard money loans are the most common, but there are others that can be used to fix and flip properties:

Hard Money Loans

A hard money loan usually refers to borrowing funds from a company or investor instead of a mortgage company. Hard money loans are used for fix and flip projects because mortgage companies don’t lend on distressed properties. Hard money finance loans charge high interest, but the term is short, usually six months to a year.

While the investor’s credit score may be relevant, the loan is generally approved or denied based on the prospects of the property. A hard money loan is usually fast and can be closed in a week or less. This is important because investment properties that are good deals sell quickly to investors; it’s important to have access to fast cash, even if it is expensive.

Hard money loans are typically the costliest form of fix and flip loans. But if the property doesn’t work out as expected and you cannot complete the project, the only loss is that the loan provider takes the house.

Second Mortgages

If you don’t want to pay for hard money loans and own properties, you may want to take out a home equity loan or home equity line of credit (HELOC). A home equity loan gives you a lump of cash at a lower rate than you can get on credit cards or personal loans. A HELOC is a line of credit that can be used whenever you like. Both loans are based on the equity in the property in question. Many investors use second mortgages on their residence to get the best rate, but you also can get a home equity loan or HELOC on an investment property.

Doing a second mortgage on your personal residence or investment property will give you access to less expensive cash. But you are putting one of your properties at risk by taking out the money, so you need to be sure that the property will be worth what you think when the project is complete. Selecting the right property and performing efficient renovations are critical to getting sufficient profit to make the project worth it. What are today’s second mortgage rates?

401k Loans

Another option for a fix and flip loan is to take money out of your 401k and invest it into fix and flips. This type of fix and flip loan is basically borrowing money from yourself and paying it back with interest. When you take a 401k loan, you will usually repay it within 60 months. Interest rates are often lower than hard money or personal loans. The approval process for a 401k loan is often easier and faster because it is your money you are borrowing.

You should only borrow money from your 401k for fix and flips if you are an experienced investor. You should be able to pay back the loan comfortably even if the property doesn’t sell for as much as you expected.

Fix and Flip Loan Highlights

Doing fix and flips is a popular way to make money in real estate. In theory, you can purchase an under-market value property with a fix and flip loan, renovate it, and sell it at a profit and pay off the loan. There are many critical details involved to ensure that the project goes well and that you can pay off the fix and flip loan.

An experienced real estate investor can typically sell a fix and flip property for a 20% or 30% profit and take the money to invest in more flips.
Speak to one of our loan professionals today to find out about your fix and flip loan options!

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