Everything You Need to Know About Fix and Flip Loans

Have you ever heard about fix and flip loans, but you are unsure of what they are? Fix, and flip loans are very popular among real estate investors due to the ability to have access to capital to fund their projects.

Are you interested in starting your first fix and flip project? Do you want to know more about the options available to you?

If this sounds like you, then you came to the right place. This brief article will go over fix and flip loans and who you can reach out to for more help.

What Are Fix and Flip Loans?

Fix and flip loans are loans for real estate investors who want to buy, rehab, and resell properties for profit. This loan is also known as a hard money loan.

Most real estate investors purchase properties in poor condition, need significant updating, or have been ignored. These loans have short repayment periods, usually less than 12 to 24 months.

The money lent is used to fund a certain percentage of the property’s renovation costs and purchase price. Most lenders look for the renovation cost and purchase price to be under 75% of the total value of the renovated property.

How Do Fix and Flip Loans Work?

As mentioned earlier, these loan options are best for purchasing properties in poor conditions. Real estate investors fix houses and then flip them back onto the market to make a profit. These lending options allow investors quick access to capital so they can start working on their projects faster.

How to Get a Fix and Flip Loan

If you are interested in starting your own project to flip houses, you will need to reach out to a private lender. Most credit unions and banks do not authorize these loans, so you will need to look into reputable private lenders with proper financial backings. Once you locate a lender, they will need information about the property you wish to rehab.

What your lender will want to know:

  • Property’s purchase price
  • Repair estimates
  • Expected after repair value
  • Your experience in real estate
  • Personal identification information

Once you have a lender who is willing to work with you, make sure that you read over the contract before you sign. The contract should state the interest rate, origination fees, document fees, or other loan fees. Make sure that you review all the fees, so you know the total cost of your loan.

70% Rule in House Flipping

Many investors use the 70% rule as a general rule of thumb to see how much they can spend on a home or a specific property. The rule states that a real estate investor should not spend more than 70% of the properties after repair value, also known as an ARV.

This number includes the purchase price and any costs for the property. There are several different costs associated with buying a property that you will need to account for in addition to the repairs and property purchase price.

Other considerations you should take into account:

  • Realtor fees
  • Closing costs
  • Holding costs
  • Insurance

The holding costs include any interest payments, taxes, or utilities. These are the costs associated with keeping the property in working order while waiting for the house to sell.

Down Payment to Fix Houses

When you obtain a loan for your fix and flip loan, you will need a down payment. The amount for the down payment depends on the lender and their loan to value requirements.

Most hard money lenders require the loan to value ratio to be between 70% to 80%. This means that you will need to put down between 20% to 30% of the loan.

Keep in mind that you will need to take any repair costs, insurance, and holding costs, into account for the loan amount you need. Several lenders will loan you the money you need to rehab the property.

Do I Owe Taxes?

When you flip a property, you do need to pay taxes. The IRS does not consider flipping a home to be passive investing. This means that you will pay standard income taxes on the profits received within the financial year.

These taxes include state income tax, self-employment taxes, and federal income tax. Make sure that you keep track of all your expenses, so you don’t overpay in taxes.

Are Fix and Flip Loans for Beginners?

Yes! Fix and flip loans are great lending options for experienced real estate investors and those new to real estate investing. Most fix and flip lenders offer better terms to those who already have experience flipping and fixing homes, but you won’t get experience until you start!

If you have a hard time finding a private lender near you, you can try to reach out to a private investor or a family member to help you. They may be able to help you with better terms and conditions.

A few private lenders are willing to help you out if you are a beginner. They also have a ton of resources available to help you understand how these loans work.

Hard Money Loans vs. Conventional Loan

At this point, you may be wondering, “why can’t I use a conventional loan or an FHA loan to rehab a project?” The answer is that these types of loans have strict guidelines they must adhere to. For example, FHA lenders only authorize loans if the home is a primary residence and is ready to move in.

Most homes bought with a hard money loan are not ready to move in and most likely won’t serve as your primary residence. The condition of these homes does not satisfy the guidelines set out by these traditional lenders. The amount of money you need for these properties and the rehab also exceed the amounts most of these traditional lenders can authorize.

What Happens if I Don’t Repay the Loan

If you do not make your payments on time for your hard money loan, you will default on the loan. The property you were working on serves as collateral if you fail to repay the loan.

So if you default on your loan, the lender will take the home into their possession and sell it to make up for their loss. If you find yourself in a bind, make sure you reach out to your lender.

They may be able to extend your loan terms to help keep you from defaulting on the loan. Be aware of any extension fees. Even if a lender lets you extend your loan, it may come at a cost.

Requirements for Hard Money Loans

The main requirement for obtaining a hard money loan has the down payment or equity. Most lenders do not concern themselves with the creditworthiness of their borrowers.

They are more interested in the property’s value in question, which will serve as the collateral for the loan. As stated earlier, you will need a higher down payment for a hard money loan. If you are interested in obtaining a commercial property, keep in mind that your down payment will be around 30% to 40% of the property’s price.

Types of Fix and Flip Loans

Real estate investors that already have experience in the industry already have certain investors they work with to access capital. If you are new to the industry, you can use several different types of loans to finance your project. Keep in mind that if you do not have any experience flipping homes, the lender may ask you for additional collateral in addition to the purchased property.

Other types of fix and flip loans:

If you have equity in your home, you can opt for a home equity line of credit or a cash-out refinance to have access to capital to fund your project. Before you commit to any other types of loans, make sure that you review the terms. If you are confident your property will sell within a short time frame, these alternatives may be a good idea for you.

Cost to Flip a Property

The overall cost to flip property can be pretty expensive. Make sure you have a comprehensive plan before you obtain financial help.

Property Acquisition Costs

This cost includes good-faith deposits, closing costs, the home’s purchase price, and any hazard cleanup. You will also need to consider any costs of liens. For example, if you need to pay off any unpaid property taxes to get a clear title.

Renovation Costs

These renovation and rehab costs include building permits, insurance, equipment rental, labor, and materials. Ensure that you consider any other expenses related to renovating the home, such as construction plans.

Loan Carrying Costs

While you wait for your property to sell, you will still need to pay monthly on the loan. If you do not, you will default on the loan, and the lender will take them home.

Selling Costs

The cost of selling your property includes any advertising or marketing expenses. It also consists of any inspections requested by the buyer and sales commission.

Where to Find a Lender

The first place to start when looking for a fix and flip loan lender is online. There are a ton of lenders out there who offer hard money loans to help fund your project.

Keep in mind that a few lenders local to you may also help, but be sure to review their reviews. Ensure that any lender you choose to work with has the proper accreditations needed to fund your fix and flip project.

How to Vet a Lender

Most experienced home flippers say the best way to see if a lender is suitable to partner with is to speak with other real estate investors. If you partake in any networking events, ask investors who they use, and they will be sure to let you know who to work with and who to avoid.

As mentioned earlier, take a look at the lender’s reviews. You can check the reviews on their website or check out other online forums to learn more about these lenders so you can make the best financial decision for yourself.

Pros and Cons of Fix and Flip Loans

The pros of this loan are that you have a faster approval process. When you go through traditional lending, you have to wait weeks, if not months, to hear back about their decision.

These lenders need to check your employment history, income, and credit score health. With a fix and flip loan lender, you can expect to hear back within the same day or a few days. The approval is mainly based on the value of the property, not your creditworthiness.

Cons of Fix and Flip Loans

One of the most significant downsides to this loan is the large down payment requirement. The reason for the high down payment is to protect the interest of the lender. Fix and flip loans are very risky, so these lenders will require you to put down a higher down payment to compensate for the risk.

Another con of a fix and flip loan is the high-interest rate. Most traditional loans have interest rates between 3% and 10%. Hard money loans require between 20% to 30% of the home loan.

Apply for Your Loan Today!

Fix and flip loans are essential to the real estate investment industry. These loans allow investors to have the cash they need to purchase properties and rehab them for a profit.

If you are ready to learn more about the application process, contact us now. We have a team of people prepared to assist you and your questions!