If you’re looking to invest in real estate, then you’re a wise entrepreneur. Real estate is one of the most time-tested and lucrative types of investments available, and there are many ways you can get started!
Flipping properties is a type of investment that’s on the rise. In 2017, only 5.7% of house sales were “flips”, whereas 2020 saw 7.5%. Well, these numbers are expected to continue, and you may want to get in on the action.
Luckily, you don’t need to be a millionaire to get started. Let’s talk about how fix and flip loans can help you start your real estate business with next to nothing!
What Are Fix and Flip Loans?
Fix and flip loans are a type of real estate loan focused on, you guessed it, “fixing and flipping” properties, which are important industry terms to understand. Of course, it all starts with buying a home and making some repairs, upgrades, or renovations. However, that’s only the beginning.
What Is a “Fix and Flip”?
In real estate, “flipping” is the process of buying a property and reselling it for a profit. Often, this involves buying a fixer-upper, putting in some work, and reselling it. In that case, you would need to sell it for more than you paid for it and more than you put into repairs to make a profit.
Otherwise, some investors may buy a property and resell it without doing any work in between. Instead, they rely on market fluctuations, supply and demand, or something else that generates profit.
For example, some investors choose to buy a house in cash that’s new to the market, as they may find a discounted price. They could then immediately resell it for a quick profit or wait until the market increases.
However, that’s not the type of investment we’re discussing. Fix and flip tends to offer a much larger payout, especially if you buy cheap.
When owners are selling a fixer-upper, they’re aware of the burden that it places and they likely don’t have the time or money to fix it themselves. Because of this, they tend to let the properties go for cheap.
If you buy a house for $200,000 and resell it a month later for $220,000, it’s not like it wasn’t worth your time. However, if you buy a fixer-upper for $50,000, put $50,000 worth of work into it, and then resell it for $220,000, then you’re making the most out of your investment. You can use a fix and flip calculator for a more specific understanding.
How Are Fix and Flip Loans Different?
Fix and flip loans are not traditional mortgages or investment loans. Instead, they are short-term loans designed to help investors purchase, renovate, and resell a property. Typically, these loans are only for 6 to 18 months at a time.
Because the loans are so short-term, interest rates are usually right between an auto loan and a credit card, usually between 10% and 18%. If you have a good credit score, it could go even lower.
Consequently, you will need to find a house that can yield you enough profit to pay for that loan. If you wind up going over budget on repairs and you aren’t able to make up for it when it’s time for resale, you could end up losing money. Always aim for at least a 20% profit margin if possible.
Remember, these loans are specifically designed for fix and flip schemes, so they maximize the benefit of a loan. The only collateral is the property in question (not your credit) and you only have to pay off the loan after the resale, making them perfect fits for house flippers.
Why Would I Need a Fix and Flip Loan?
So, why would you choose a fix and flip loan instead of a traditional business loan or mortgage? Well, there are some instances when it makes more sense to pay it off sooner. Here are a few examples.
Of course, if you’re looking to flip houses but don’t have the money upfront, then you’re a prime candidate for a fix and flip loan. If you have good credit, you could get one for a very low-interest rate.
Some investors may not think they need a loan to fix up a property, but they often underestimate the cost. If you are paying for labor, expenses add up. That’s why this is a common method for carpenters, electricians, and other tradespeople, as they eliminate the need for labor costs.
However, that’s not entirely necessary. Anybody can fix and flip a house.
The reason they can do this is that real estate is one of the few investments where you can get involved with such a low barrier of entry. All you need to do is secure a fix and flip loan and you could resell a property or rent it out for profit. If you have most of the money, you may only need a bridge loan to get started.
From there, your investment is entirely under your control, which is why real estate is so popular. Unlike stocks, your decisions have a major impact on the outcome of your investment.
The benefit of using a fix and flip loan for flipping houses is that you won’t have the debt hanging over your shoulder for longer than it needs to. Once you resell the property, you simply pay off the loan and keep your profits. Also, you won’t have annoying payments in the meantime like you would with other loans.
Maximizing Your Investment Property
Some investors may choose to “flip” a property but not for resale. At least, not immediately.
One of the most popular types of real estate investments follows the BRRRR method, which often relies on flix and flip loans. BRRRR stands for buy, rehab, rent, refinance, repeat. The first two are where the loan comes in.
To buy and rehabilitate a property, you first need capital. Even if you’re doing all the work yourself, building materials are still expensive, which is why investors often rely on loans.
Essentially, to maximize your investment, you buy a fixer-upper, fix it up and rent it out. Not only will you generate monthly income for yourself, but the resale value will be higher with existing tenants. From there, you do a cash-out refinance and use that cash as a downpayment on the next property.
While that method isn’t a guarantee for investors, it is very popular for getting the most out of your real estate business as quickly as possible. Flipping a house doesn’t have to be narrowed to one big payout if you prefer a steady income.
However, in this case, you will either need to take out an extra loan once you have investors if you don’t want to resell and instead opt for a longer-term loan. If you have the cash to repay the loan by this time, then that won’t be necessary.
Diversifying Your Portfolio
As an investor of any kind, you should always consider diversifying. Whether you invest in real estate, stocks, or anything else, you can always try investing in fix and flip real estate.
You don’t have to be a handyman to be successful in the industry. Millionaires still say that real estate is the best investment, and that’s been the consensus for a long time. Whether you’re looking to resell, rent, or both, it could give your portfolio the boost that it needs.
Also, if you don’t have the cash on hand, that’s fine! As we mentioned, anybody can get into real estate thanks to the availability of loans.
Fix and Flip Loan Guide
Now, every loan and every property is bound to be different, so there isn’t a one-size-fits-all solution to real estate investing. However, here are some general tips to get the most out of your loan and your investment!
Determine if It’s Right For You
Now, before we offer any fix and flip loan tips, you should first determine if this is what you want to do with your investment money. There are plenty of other types of real estate investments out there that could earn you a serious return.
Real estate investment trusts yield substantial dividends and rental properties earn monthly income. However, neither offers the same lump sum payout that flipping a house offers.
If you think you might want to rent out your property later on, then a traditional rental loan is probably the right solution. However, making payments while fixing the house is a drag. Just make sure you’re planning to resell before choosing this style of loan.
Especially if you aren’t going to be doing the repairs yourself, you should crunch the numbers and find out exactly how much money you will need. Again, labor expenses add up quickly, so give yourself as much leeway as possible.
Choose the Right House
The first, and arguably most important, factor is to choose the right house. Even if the property is your only collateral, you still want to maximize your investment and get the best deal.
Never take properties at face value. Always get the home thoroughly inspected to understand how much work you will need. You don’t want to run out of funding halfway through your project.
Also, ensure that you have the time and/or resources to handle this project at the current moment. After closing, you will only have 6 to 18 months to fix the property and resell it, depending on the terms of your loan. Ensure that the work needed on that house fits this timeframe.
Remember, interest rates on a fix and flip loan are higher than mortgages, so you need to keep your margins as high as possible. If you’re unsure about a property, it wouldn’t hurt to wait for a safer investment.
At the same time, you don’t want to buy a more expensive house that’s already in good shape. Even if you make plenty of new renovations, there is no guarantee of an ROI. There’s a fine line to tread between a lost cause and a great home if you want to maximize profits.
Choose the Right Loan
If you’re certain that a fix and flip loan is right for you, then you need to know how to choose them! First, you want to figure out your credit score and get an idea of the interest rate you want.
Next, you want to get your necessary paperwork in order. You should have proper identification, income statements, and the amount of money you seek to take out for the loan.
Then, talk to lenders and try to get preapproved for a loan. Pre-approval will help you when it comes to making an offer, as you’ll be able to show the seller that you are a serious buyer and that you can put the money down right away.
If the interest rate and terms match your needs, then you can start shopping for houses or put an offer on the one you want! Once it closes, you’re good to start fixing and flipping it for a profit!
Build Your Real Estate Business Today
Now that you know about fix and flip loans, you can determine if it’s right for your type of investment.
Fix and flip loans are an excellent way to get the cash you need to earn a profit, so if you want a big payout, you know what to do! Stay up to date with our latest real estate news and feel free to start a loan with us today!