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8 Financing Options for Fix and Flip Loans

8 Financing Options for Fix and Flip Loans

8 Financing Options for Fix and Flip Loans

Ready to start flipping houses? It can be a lucrative way to make thousands of dollars in a short period of time. However, you typically need to have a good amount of cash to get started. If you don’t have enough money to buy a home and pay for renovations tucked away in savings, you’ll need to explore your financing options with fix and flip loans. 

Fix and flip loan Recommended for
Hard money loan
  • Experienced investors with 2+ flips
  • Investors with struggling credit
  • Investors who can’t arrange alternative financing methods
  • Novice investors working with a contractor
Cash-out refinance loan
  • Investors with existing investment property and at least 30% to 40% equity
Home equity line of credit
  • Flippers who are homeowners and have at least 20% equity in their primary residence
Seller financing
  • Transactions where the seller doesn’t mind structuring the sale unconventionally
Investment property line of credit
  • Investors with equity in rentals who want cash for purchases
Bridge loan
  • Investors who want to close quickly and plan on getting other financing later
Permanent bank loan/online mortgage
  • Buy-and-hold investors who want to flip over 5+ years
Business line of credit
  • Used for short-term working capital to help improve cash flow or to finance the costs of unexpected expenses

What is a Fix and Flip Loan?

A fix and flip loan is a short-term loan for a real estate investor, who uses the funds to purchase a home and/or renovate it before selling it for a profit. It is used for business purposes, not personal.

How Does A Fix and Flip Loan Work?

When it comes to real estate investments, you may not want to (or be able to) tie up all your cash in the purchase and renovation of a home you plan to sell for a profit, so you look toward a short-term loan (usually 6-18 months) to cover the expenses. You may only want a rehab loan to cover the remodeling costs, or you may want a loan to cover both the home mortgage and those remodeling costs.

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.

The Cost of Fixing and Flipping A Home

If you’re new to real estate investing, it’s important to factor in both the price of the home you want to buy as well as the rehab costs to remodel it. Inevitably, renovation costs are more than you account for, so plan for a buffer to ensure you don’t run out of money before the walls have been painted.

Advantages of Fix and Flip Loans

So why take out a fix and flip loan? First of all, it frees up your cash flow so it’s not all tied up in a high-cost investment. You can continue to use the cash you have on hand to run your business while you use the loan funds for a specific real estate project.

You may also be able to afford more house with a fix and flip loan. Maybe you have some cash you can use for your investment, but want a home that is just out of reach. A loan can help you have more buying power.

You can also diversify your investments, taking out a loan for each home you are remodeling to sell.

Types of Fix and Flip Loans

When it comes to fix and flip business loans for small business, there are eight main financing types. Which one is best for you is dependent on your credit, your experience in real estate investing, and your financial goals. 

1. Hard Money Loan

If you’re an experienced investor who has completed a few flips before, have bad credit, or are struggling to qualify for a conventional loan, one way to fund your next flip is a hard money loan

With a hard money loan, you work with non-bank hard money lenders, such as individuals or online lenders, to get the money you need. Hard money lenders usually have less strict eligibility requirements, so you can qualify for financing even if your business credit scores aren’t great. And, you can often get the money quickly. 

However, hard money lenders tend to have higher interest rates than other types of loans, and they often have shorter repayment terms, so keep that in mind. 

2. Cash Out Refinance Loan

Using a cash out refinance loan is a financing strategy where you refinance an existing property to fund your flip’s purchase or renovations. You use your current home’s equity to take out a new loan and pay off the existing mortgage, and you can use anything left over to finance your flip. 

In order for a cash out refinance loan to make sense, you need to have 30% to 40% equity in your home. Otherwise, this approach won’t be cost-effective. 

3. Home Equity Line of Credit

If you currently own a home beyond the house you intend to flip, you have a potential financing source with a home equity line of credit (HELOC). Home equity lines of credit are secured by your house, so you can get financing at a low interest loan rate and just take what you need, up to the credit limit. 

HELOCs are based on the equity you have in your home — the value of the home minus what you owe on the mortgage. You can tap into a HELOC if you have at least 20% equity in your home, and you can borrow up to 85% of the home’s equity. 

For example, if you owned a $200,000 home and you owed $150,000 on it, your equity is $50,000. Traditional lenders like banks will allow you to borrow up to 85% of your home’s equity, so you could get access to a $42,500 HELOC to use for your flip. 

4. Seller Financing

In some cases, you may be eligible for seller financing. With this approach, you as the borrower work with the seller to come up with a payment plan and to create a contract. You’ll make payments directly to the seller on an agreed upon schedule, based on a price you both set with interest. 

Because seller financing poses more risk to the original property owner, you’ll usually pay a higher interest rate and have a shorter loan term than you would with other loans. However, they can be a great way to finance a fix and flip if you’re unable to secure other financing. 

5. Investment Property Line of Credit

If you own a rental property, you may be able to take advantage of an investment property line of credit. Like a HELOC, you can borrow against your real estate investment property’s equity, with the property serving as collateral. 

To qualify for an investment property line of credit, a borrower usually needs good to excellent credit, and to have a history of successful real estate investments. You typically need to own the property for at least one year before you will be eligible for an investment property line of credit. 

6. Bridge Loan

A bridge loan is a useful option if you need to cover the gap between when you want to buy a property and when you can secure long-term financing. Using a bridge loan can help you cover the cost of the down payment on your next flip, and then you can focus on finding another financing option, such as a traditional mortgage, to pay for the rest. 

Bridge loans are typically secured by collateral, so you can qualify for a loan with a lower interest rate than you’d get with some other loan options. And, they’re often easier to qualify for than other loans for most borrowers. 

7. Permanent Bank Loan/Online Mortgage

If you’re looking to buy a home that you can stay in for five years or more while you renovate it, a regular mortgage with a fixed interest rate from a traditional bank or credit union is likely your best bet. You’ll qualify for lower interest rates than you’d get with other financing options, and have up to 30 years to make payments on the loan. 

However, you’ll need to have enough money saved for a down payment, good to excellent credit, and stable income to qualify for a mortgage. 

8. Business Line of Credit

If you’re an experienced real estate flipper and have a history of completed deals and profits, another financing option is a business line of credit. With a business line of credit, you get access to a revolving credit line. You can use up to a set amount, but you only make payments and pay interest one the amount you actually use. 

Business lines of credit are especially useful for home flippers, as you can use yours again and again when issues pop up. Or, you can tap into it when you tackle your flip. 

Most banks offer business lines of credit, but you typically need to have excellent credit and a stable history of flipping success to qualify. 

Other Financing Options

If none of these loan options fit what you need, consider using business credit cards if you just have a few expenses related to your remodel, or look at other types of small business financing.

What To Look For In A Fix And Flip Lender

As you start considering the types of rehab loans that would be a good fit for your distressed property investment, look at all construction loan real estate options, from conventional lenders to non-bank lenders specializing in real estate lending.

Make sure to shop around. One company may have higher interest rates or less favorable terms than another. One lender might let you take out multiple loans at a time. The key is finding a lender that meets your needs with the right house flipping loan.

The Bottom Line

If you intend to start flipping houses but are short on cash, there are multiple small business loans and financing options available to make your dreams a reality. When considering your options, make sure you compare offers from multiple lenders and take your own experience and credit into account to make an informed decision.

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This article was originally written on October 30, 2019 and updated on November 6, 2020.

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ABOUT AUTHOR

Kat Tretina

Kat Tretina is a personal finance writer who is focused on helping people pay down debt, boost their incomes, and start their own businesses. Her work has appeared in publications like The Huffington Post, Entrepreneur, MarketWatch, and more.

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