For new real estate investors, one of the best avenues for starting in real estate investing is through flipping houses. Investors find a distressed property and purchase the property at a discounted price. Then they invest in the rehab and profit from the new market value. Shows such as Fixer Upper and Flip or Flop have boosted the popularity of house flipping. This has flooded the market with new investors looking to capitalize on high returns.
In this article, we’ll take a look at fix and flip loans, planning a budget, finding a team, and profiting!
Flipping houses for profit has become an increasingly popular way to make money in real estate. With hit TV shows like Flip or Flop glamorizing the process more and more people are giving fix and flips a try.
But successful flipping takes more than good design skills and a knack for finding hidden gems. Securing funding for your first flip can be one of the biggest hurdles for new investors.
As a first-time flipper, you likely don’t have an established track record or deep pockets to fund fixes and flips on your own. And traditional lenders don’t offer standard mortgage products for investors looking to purchase and renovate homes for resale.
Luckily there are specialized lending products, known as fix and flip loans, designed for just this purpose. While financing will still take some work to secure, the reward can be well worth the effort. On average, flippers make $66,000 profit per flip according to Attom Data Solutions
This guide will walk through the key things every new flipper should know to get funding for their first project.
Overview of Fix and Flip Loans
A fix and flip loan is a short-term financing product that provides capital to purchase and renovate a property for resale. These loans are secured by the investment property you plan to flip.
Most fix and flip loans offer 6-18 month terms so you can buy, remodel and sell the home within a relatively quick timeframe. These specialized loans also allow for interest-only payments during the renovation phase.
The maximum you can borrow is based on a percentage of the home’s expected after-repair value or total project costs. So lenders will assess the property’s purchase price and estimated renovation budget to determine your available financing.
Top Options for First-Time Flippers
As a new flipper, you’ll likely need to rely on your personal finances and credit history to qualify for funding. Once you build a track record of successful flips, more options will open up.
Here are three of the most accessible financing sources for first-timers:
Personal Loans
Online lenders like Lightstream and SoFi offer personal installment loans up to $100,000. Rates start around 5-7% and repayment terms up to 7 years.
Pros: Fast online applications, funds in 1 week, fixed rates and terms. Can use for any purpose.
Cons: Require strong personal credit history. Limited loan sizes.
Home Equity Loan/Line of Credit (HELOC)
Banks will lend against 15-85% of the equity in your home. Typically need at least 15% equity to qualify.
Pros: Interest rates around 5%, larger loan amounts, deductible interest.
Cons: Risk your home as collateral, closing costs, home appraisal required.
401(k) or IRA Financing
Allows you to borrow 50% of your retirement account balance up to $50,000. Interest paid to yourself.
Pros: Easy to qualify, low rates, no home collateral required.
Cons: Repayment limits and risks to your retirement funds.
I used a 401(k) loan for my first flip back in 2018. While it worked out, there were a few things I wish I knew beforehand. Make sure to understand all the repayment rules and risks before going this route.
7 Tips for Securing Your First Fix & Flip Loan
Getting approved for financing as a first-time flipper may take some extra effort. Here are my top 7 tips for boosting your chances:
1. Have a Solid Business Plan – Lenders will want to see a detailed renovation budget, ARV estimates, and timeline for purchase, repairs, and resale.
2. Highlight Your Skills – Play up any construction or real estate experience you have even if you’ve never flipped before. Lenders look for ability to successfully complete projects.
3. Seek a Co-signer – A business partner or family member with better credit may be able to co-sign and help you qualify. Make sure to have a written agreement detailing their role and compensation.
4. Provide Extra Collateral – In addition to the flip property, offering your own real estate or funds as added collateral can help offset risk due to inexperience.
5. Explore Alternative Lenders – Online lenders may offer better terms than banks for first-timers. But watch out for very high rates and fees from hard money and private lenders.
6. Start Small – Request just enough to fund your first modest flip rather than maximizing loan amounts out of the gate.
7. Highlight Exit Strategy – Emphasize how you already have a realtor lined up and have identified motivated buyers for the neighborhood.
Securing that first financing hurdle is tough, but gets much easier once you have a successful track record. Don’t get discouraged if you face rejections at first. Persistence and preparing solid loan applications are key.
What Info Do Lenders Require?
When applying for a fix and flip loan, most lenders will request similar information. Be prepared with the following:
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Loan amount requested – Detail total purchase price, rehab budget, and soft costs.
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Business formation docs – Articles of organization if you set up an LLC.
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Project address – Have property address where available along with details like square footage.
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ARV documentation – Comps and estimated after-repair value from appraisers.
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Scope of work – Detailed list of all planned renovations and costs.
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Contractor estimates – Written bids validating rehab budget.
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Timelines – Estimated timeline for purchase, repairs, and resale.
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Financial statements – Personal and business tax returns, bank statements, profit and loss.
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Exit strategy – Information on how you will sell the renovated home – realtor, MLS listing, interested buyers.
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Collateral – Details on property and any other assets you will use as collateral.
Having all this information readily available in a loan proposal will help speed up the application process and improve your chances of getting approved.
Mistakes to Avoid as a Fix & Flip Newbie
After talking to many first-time flippers, there are a few key mistakes I commonly see:
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Not accounting for unexpected costs and delays
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Overpaying for properties based on ARV rather than purchase + rehab costs
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Taking on cosmetic fixes without fully evaluating structural issues
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Getting locked into low-profit flips by high acquisition and financing costs
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Working with unexperienced or unscrupulous contractors
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Securing financing before fully understanding risks and obligations
Flipping houses is never simple, but being aware of these common pitfalls from the start helps avoid costly mistakes. Connecting with mentors and other local flippers can provide invaluable insight as you start out.
And remember, start small, don’t overleverage, and have contingencies in place in case your timeline or budget goes off track.
Is Fix & Flipping Right for You?
If you’re willing to put in the sweat equity, flipping houses can be an incredibly rewarding endeavor both financially and in experience gained.
But make sure you go in with eyes wide open. Flipping isn’t a get-rich-quick scheme and does carry real risks if you aren’t prepared.
Connecting with other investors, understanding regulations, securing financing, hiring contractors, accurately estimating costs and timelines all take considerable education.
While TV shows glamorize house flipping, the reality involves a lot of hard work and persistence. Going in aware of the challenges will set you up for success on your first flip and beyond.
Ready to Get Started?
As you move forward with your first flip, I’d be happy to answer any questions that come up! Feel free to reach out via email or our contact form.
And when you’re ready to start evaluating financing options, we have a network of specialized lenders we work with who provide funding for new fix and flip investors.
Here’s to a profitable first flip!
John Smith
Real Estate Investor
www.firstflipfinancing.com
[email protected]
Loan to Value
Loan to value is how much a lender will lend on the current value of the property. For fix and flip projects, a hard money lender will typically set the maximum loan to value at 70%.
How much money does an investor need to have saved to complete the purchase of a property? Knowing the down payment is a key cost with financing a fix and flip hard money loan. Closing costs should also be factored into the costs due at the closing table.
The profit on fix and flip loans comes from the renovation of the property. A hard money lender will typically finance renovations as a part of the total loan amount. Additional renovation costs will be hiring a contractor to help with completing the upgrades on the property.
ARV or After Repair Value can be calculated to estimate the market value of a property after the renovations have been completed. The After Repair Value is calculated by adding the purchase price and the renovation value. It’s important to have a good understanding of ARV and to be sure that the property makes sense and the returns are high enough to justify investing.
Real estate investors can normally obtain a fix and flip loan from three sources. Each option offers different advantages for obtaining the financing for a fix and flip loan and it is ultimately up to the investors on which option makes the most sense for their fix and flip project.
Funding Your Fix and Flip Loan
A hard money loan for fix and flip financing can be obtained from a hard money lender. Hard money lenders specialize in funding fix and flip loans and generally require less documentation than a traditional mortgage. Interest rates on a hard money loan is typically higher than conventional loans, but the speed and reliability of hard money loans is often worth the higher interest only payments.
Hard money lenders can also provide bridge loans. A bridge loan allows investors to renovate a property and refinance the loan into a long-term rental property with lower interest rates. This strategy is the BRRRR strategy.
Fix and Flip Loans [For Beginners]
FAQ
How do I fund my first fix and flip?
What is the 70% fix and flip rule?
How much money do I need to flip my first house?
What is a fix and Flip loan?
Fix and flip loans can be structured in different ways, such as a term loan or line of credit, depending on your lender and financing needs. These loans are typically secured by the property you’re purchasing and renovating. Often there’s no penalty if you want to pay off the loan balance early.
How does a fix & flip mortgage work?
Typically fix and flip loans have a fixed interest rate, and many may be balloon mortgages where you pay only interest until the end of the loan term, at which time the principal is due. You pay the monthly mortgage payment on the loan while you renovate or have the house on the market, then pay the balance of the loan once you sell the home.
How do I get approved for a fix-and-flip loan?
To get approved for a fix-and-flip loan, you often need to meet credit score minimums, make a certain size down payment, and provide lenders with a copy of your employment, residential, and credit history. Many lenders offer loans that can help you engage in fix-and-flip projects. The key lies in finding a property that needs affordable improvements and can be sold at a profit.
Can you pay off a fix and Flip loan early?
Often there’s no penalty if you want to pay off the loan balance early. To determine the amount of funding you’re eligible to receive for your loan, fix and flip lenders may use a number of formulas including the loan-to-value ratio, loan-to-cost ratio and after-repair value.