Fix and flip loans allow real estate investors to purchase and renovate properties for resale at a profit. While house flipping can be a lucrative business, accessing fix and flip financing poses unique challenges for new investors. This beginner’s guide covers everything you need to know about getting started with fix and flip loans.
What Are Fix and Flip Loans?
Fix and flip loans also called rehab loans or bridge loans provide short-term financing that investors use to renovate and quickly resell residential properties for a profit. These loans help cover the purchase price, renovations, holding costs and other expenses tied to flipping houses.
Fix and flip loans typically have higher interest rates and shorter repayment terms compared to traditional mortgages. Loan terms often range from 6 months to 3 years.
These non-conforming loans are offered by private lenders, hard money lenders and some banks However, new investors may struggle to qualify for fix and flip loans from traditional lenders that focus on an applicant’s credit score and financial history.
Fix and Flip Loan Options for Beginners
As a new real estate investor, you have several options to fund your first fix and flip project:
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Personal Loans – An unsecured personal loan from an online lender lets you borrow a lump sum of $5000 to $100000 to cover purchase and renovation costs. Terms often range from 2 to 7 years.
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401(k) Loan – If your employer-sponsored 401(k) allows loans, you can borrow up to $50,000 penalty-free. The loan must be repaid within 5 years.
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Home Equity Loan – Borrow against your home’s equity. Loan amounts range from $15,000 to $500,000 based on your equity and lender limits.
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Hard Money Loans – A short-term, high-interest loan from a private investor. Loan-to-value ratios up to 90% are available for new flippers.
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Seller Financing – The seller carries back financing. You’ll make payments directly to the seller.
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Crowdfunded Loans – Pool money from multiple individual investors via an online platform.
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Business Credit Cards – Use 0% intro APR cards to cover smaller renovation expenses.
Weigh the pros and cons of each option to choose the best source of fix and flip funding for your first project.
How to Qualify for a Fix and Flip Loan as a Beginner
Lenders look at several factors when evaluating a fix and flip loan application:
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Credit score – Most lenders require a minimum score around 600. The higher your score, the better your loan options.
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Cash reserves – Expect to provide 10% to 20% of the project costs as a down payment.
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Collateral – The property being renovated secures the loan. Some lenders may also require a lien on other personal assets.
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Experience – Beginners can build credibility by partnering with more experienced flippers.
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Exit strategy – Show how you will repay the loan through the eventual sale of the renovated home.
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Project viability – Provide detailed cost estimates and show the property’s profit potential.
Build your qualifications where possible before applying. Partnerships, seller financing and hard money loans offer more flexibility for newcomers.
How Much Can You Borrow?
As a first-time fix and flipper, expect to receive 50% to 70% of a project’s total costs in financing.
Lenders use formulas like the loan-to-value ratio and loan-to-cost ratio to determine loan amounts:
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Loan-to-Value (LTV) – The loan amount compared to the property’s purchase price. 50% to 70% LTV is common for beginners.
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Loan-to-Cost (LTC) – The loan amount compared to the total project costs. 50% to 70% LTC is typical.
For example, if you buy a $100,000 property and renovations will cost $30,000, the total project cost is $130,000. With 60% LTC, you could qualify for around $78,000 in financing.
Hard money lenders may provide higher LTC ratios up to 90%, but interest rates are much higher.
Interest Rates and Fees on Fix and Flip Loans
As a new investor, expect to pay 10% to 15% interest on a fix and flip loan. Here are estimates:
- Hard money loans: 10% to 15%
- Personal loans: 10% to 35%
- 401(k) loans: Around 5% typically
- Home equity loan: 5% to 10%
- Seller financing: 6% to 12%
- Crowdfunded loans: 8% to 12%
Additional costs like origination fees (1% to 5%) and draw fees for accessing installment loan funds (around 1% each draw) also apply with most loans.
Higher interest rates and fees offset the increased risk lenders take on when financing new investors. But don’t let these costs deter you. The profits from a successful flip can outweigh loan expenses.
5 Tips for Getting Approved for a Fix and Flip Loan
Follow these tips when seeking financing for your first rehab project:
- Start with a small project – Aim to borrow $100,000 or less to start.
- Know your numbers – Calculate realistic renovation budgets and projected profits.
- Have some skin in the game – Put up at least 10% to 20% as a down payment.
- Review your credit – Build your score above 640 to increase lender options.
- Lean on partnerships – Team up with experienced flippers to improve loan eligibility.
What to Know Before Getting a Fix and Flip Loan
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You must be able to sell the renovated property within 6 months to 3 years to repay the loan.
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If you default, the lender can foreclose and take ownership of the property.
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Interest payments on these short-term loans can be very expensive.
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Your personal finances and assets may be at risk if you are unable to sell for a profit.
Only use fix and flip loan funds for approved expenses. Careful planning and conservative cost estimates are key, especially on your first flip.
Alternatives to Fix and Flip Loans
If you need more time to build qualifications for traditional fix and flip financing, consider these alternative funding options:
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Save up cash from other ventures to self-fund smaller flips.
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Use 0% APR business credit cards for renovations and holding costs.
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Partner with real estate wholesalers to fund deals at steep discounts.
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Consider a lease-option agreement to purchase a property.
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Use equity partnerships to fund flips by pooling money from others.
Starting small, leaning on partnerships, and getting creative can help you gain experience even without financing. Within 12 to 24 months, you can become eligible for better fix and flip loans.
Final Tips for Getting Your First Fix and Flip Loan
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Shop lenders to compare loan amounts, rates, fees and eligibility requirements.
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Hire a real estate attorney to review loan documents and protect your interests.
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Choose experienced real estate agents and contractors to ensure a quick turnaround.
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Build a detailed project plan and timeline to demonstrate viability to lenders.
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Be conservative with cost estimates – unforeseen expenses easily arise.
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Keep some cash reserves to cover unexpected overages during renovations.
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Network with local investor groups for mentorship opportunities.
With careful planning and persistence, new investors can secure financing, successfully renovate and sell their first investment property, and prove their ability to profitably flip homes.
The groundfloorlending difference
- No minimum transactions experience required
- Five year lookback for experience
- Minimum property value of $50,000
- Minimum credit score of 640
- 12 and 18 month terms
- No hard credit pulls
- Rates start at 10.5% and roll points into closing cost
- Loan sizes from $75,000 to $750,000
- True deferred payments — no payments until repay
- Up to 70% loan-to-after repair value
Fix & Flip LoansFrequently Asked Questions
House flipping can be a profitable investment strategy when done correctly. In a strong housing market where demand for properties is high and prices are rising, it can be relatively easy to find a property at a discounted price, renovate it, and sell it for a profit. Additionally, with the right renovation strategy, it’s possible to increase the property’s value significantly, allowing the investor to earn a substantial return on their investment.
However, house flipping can also be risky and time-consuming. Flipping a property involves significant upfront costs — including the purchase price, renovation costs, and closing costs — which can eat into potential profits. Additionally, unexpected issues can arise during the renovation process, such as unforeseen repairs, permitting issues, or delays, which can further increase costs and delay the sale of the property.
There are several ways to find houses to flip, including:
- Real estate agents: One of the most common ways to find houses to flip is through real estate agents. Agents have access to a large inventory of properties, including distressed properties that may be suitable for flipping.
- Online listings: Online real estate platforms, such as Zillow, Redfin, and Realtor.com, can be a great resource for finding potential flip properties. You can search for properties in specific areas and filter by price, condition, and other criteria.
- Foreclosure auctions: Foreclosure auctions can be a good source of potential flip properties, as they often offer properties at discounted prices. However, it’s important to do thorough research beforehand and have a clear understanding of the risks involved.
- Direct mail campaigns: Some investors use direct mail campaigns to target homeowners who may be interested in selling their properties. This can involve sending letters or postcards to homeowners in specific neighborhoods or areas.
- Networking: Networking with other real estate professionals, such as contractors, property managers, and other investors, can also be a great way to find potential flip properties. Attend local real estate investor meetings or join online investor groups to connect with others in the industry.
When searching for potential flip properties, it’s important to do your due diligence and thoroughly research each property before making an offer. This can include conducting a property inspection, evaluating the local market, and estimating renovation costs to determine if the property is a good investment.
Flipping a house can be a complex and challenging process and having some relevant experience can be helpful in ensuring a successful project. Here are some skills and experience that can be useful for flipping houses:
- Real estate knowledge: A solid understanding of the local real estate market, including current trends and property values, helps borrowers identify potential flip properties and set realistic expectations for the project’s profitability.
- Construction and renovation experience: Flipping a house often involves significant renovations, so having experience with construction or renovation work can also be beneficial. This includes knowledge of building codes, design, and construction techniques.
- Project management skills: Flipping a house requires coordinating various contractors and vendors, managing budgets, and staying on schedule. Strong project management skills helps the project run smoothly and stay on track.
- Financial management: Flipping a house requires managing budgets, estimating costs, and securing financing. With some financial management experience, borrowers can better ensure the project is profitable.
- Marketing and sales experience: Once the project is complete, it’s important to effectively market and sell the property to potential buyers. Experience in marketing and sales better ensures that investors present the property in the best possible light and sold quickly for the desired price.
How To Finance Fix And Flip
FAQ
Is a fix and flip loan a hard money loan?
How do I find fix and flip investors?
Do banks give fix and flip loans?
What loan do house flippers use?
What types of financing are available for Fix and flip loans?
Several types of funding are available for fix and flip loans, including traditional hard money loans, equity-based loans, seller financing and business lines of credit. A hard money loan involves borrowing funds from a private investor or company rather than a traditional financial institution.
How do you make money with a fix and Flip loan?
Here is a list of our partners and here’s how we make money. What is a fix and flip loan? A fix and flip loan is short-term financing that real estate investors use to buy and renovate a property in order to resell it for a profit, a process known as house flipping.
Are fix and flip loans a good investment?
Fix and flip loans are best for experienced real estate investors who know how to identify target properties, understand the costs of renovating properties and can sell the updated properties quickly. The key to success with fix and flip loans is having a well-developed plan and finding a lender who is a good fit for your project.
Can you get a fix & Flip loan at a bank?
Because fix and flip loans are not your typical home loan, finding financing at a traditional bank may be challenging. Also, while SBA loans can be used to purchase commercial real estate for your business, they typically aren’t an option for the purchase of residential property for resale.