The Beginner’s Guide to Fix and Flip Financing
Buying a house, repairing it, then selling it is referred to as a “fix and flip.”
You’re investing in a home for a quick return based on the equity you gain from the improvements you make. Most of the value gained from homeownership comes from the gradual increase in property value over time, but fixing and flipping a home gives you relatively fast returns.
Traditional mortgages, though, might hold some disincentives for buying and selling a home that quickly. That’s where fix and flip financing comes in.
So, what is fix and flip financing?
Basic Guide to Fix and Flip Financing
Fix and flip loans are mortgage plans built for those who plan to buy a house, make repairs, and sell it in under two years. Some loans might be structured around longer plans, but the general fix and flip time period is somewhere under two years.
These loans are structured a little differently than traditional mortgages, though, so it’s important that you know what you’re getting.
A traditional mortgage is set over the course of a few decades in most cases. Typically, the loan is extended over 15 to 30 years and holds an interest rate under 5%.
These loans have low rates because the term of repayment is so long, allowing the lender to get a significant return on their investment. Fix and flip loans, on the other hand, tend to have higher interest rates because the term is shorter.
A short term requires the lender to increase the rate so that they can financially justify giving the loan. So, if the rates are always lower on traditional mortgages, why not just go with that option for your fix and flip?
Added Value of Fix and Flip Loans
A traditional mortgage won’t provide you with any additional financing to take care of the repairs needed to increase the property value. Those who own a home for long periods of time typically refinance after a few years and use that equity to make repairs.
Without added home equity, though, it’s difficult to come up with the tens of thousands of dollars needed to do renovations. You might be able to make cheap adjustments that increase the value marginally, but investing in a fix and flip usually means that you’re looking for a serious return.
Unless you have a significant amount of cash to use on the project, you’ll be hard-pressed to afford the sort of renovations that will boost your home value.
How does fix and flip financing work to benefit those without liquid cash, though?
The thing that sets these loans apart is the fact that they account for the estimated costs of the renovations you’ll make on the home. Having the funding of a fix and flip loan will put you in the perfect position to own the home, afford renovations, and reap the benefits of the increased property value.
All of this happens without you needing to dip into your savings or work to gather the project funds. These loans, then, make fixing and flipping an investment option for people in nearly any economic bracket.
Another beautiful thing about fix and flip financing is that you can get along with the process much faster than a traditional mortgage. Mortgages tend to take a month or two before you’re ready to move in, whereas fix and flip loans can be in your hand within a week or two.
Additionally, these loans are hard cash loans, meaning that the money is yours to use in hand.
Because interest rates are higher and the term is shorter, a hard money loan for fixing and flipping a house will be more accessible to those with dings on their credit. Mortgages can be difficult to acquire without great credit, while fix and flip loans come a little easier.
If you wind up getting into a difficult financial situation with the property you purchase, you can be happy knowing that these loans are backed by the value of the house. In other words, the house is the leverage that the lender has if you should go into foreclosure.
The lender thinks more about the value of the investment rather than the person borrowing money whereas traditional mortgages are concerned more with your personal credit history and debt-to-income ratio.
If you go into foreclosure, the lender can likely sell the home for a profit. That makes their risk lower if you don’t appear creditworthy on paper.
Tips for Fix and Flip Financing
If you’re planning to buy and sell a home in this way, there are a few things that you should keep in mind before you go ahead with the loan.
First, make sure that you know precisely what you plan to do with a home before you take out a loan to repair it. You’ll have a much easier time getting the loan with a clear-cut plan.
Having that plan will also reduce the risk on your end. If things fall through as you work through renovations, you’ll be out of the increased home value, and the home might be worth less money if it winds up in disrepair.
That would leave you with a home that doesn’t have enough money to pay back the loan if you sold it. You might also have to sell the home at around the same value that you bought it for. That’s a lot of time and effort on your part for very little reward.
You can safeguard yourself against those losses by consulting with contractors, builders, and other professionals before you purchase the home. If you’ve got your eye on a property, invest some time into understanding the home and its needs before you start financing.
Then you can start to get a ballpark idea of the costs needed to repair it and use that number to guide the value of the loan.
Want to Learn More about Fix and Flips?
Fix and flip financing can really help you put a foot forward with an excellent investment. There’s a lot more to learn about these loans, though, and we’re here to help you.
Contact us for information on financing, home repairs to consider, and much more.