8 Financing Options for Fix and Flip Loans

8 Financing Options for Fix and Flip Loans

8 Financing Options for Fix and Flip Loans

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Ready to start flipping houses? It can be a lucrative way to make money, helping you make thousands of dollars in a short 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

8 financing options

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

1. Hard money loan

If you’re an experienced investor who has completed a few flips before, have poor credit, or are struggling to find other financing options, one way to fund your next flip is a hard money loan. 

But how do hard money loans work? With a hard money loan, you work with non-bank 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 credit score isn’t great. And, you can often get the money quickly. 

However, hard money loans tend to have higher interest rates than other types of loans, and they often have shorter repayment terms. 

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 rate. 

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. 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 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 repayment 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. 

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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 investment property’s equity, with the property serving as collateral. 

To qualify for an investment property line of credit, you usually need good to excellent credit, and 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 financing options. And, they’re often easier to qualify for than other loans. 

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 bank or credit union is likely your best best. 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 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 it 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. 

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 June 30, 2020.

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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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