Introduction
Today, fix-and-flip loans have become essential for house flippers that need startup capital without a lot of strings attached. Whether you want to start a dedicated house-flipping business or earn money on the side, you don’t need a top-tier bank account.
From experienced and reputable real estate investors to new property-flipping businesses, several loan options are available in the market. Fortune records that the average gross profit rendered by a house flip was $65,000 in 2021.
In comparison, there’s been a decrease in generated gross profit in house flipping. However, real estate investors are aware that there are plenty of opportunities to make money out of flipping houses. It is vital to note that house prices increased by over 20% between March 2021 and March 2022. Despite increasing mortgage rates, home prices continue to increase, which means there is significant profit potential in house flipping.
Keeping that in mind, let’s look at the fundamentals, benefits, and how to secure fix and flip loans:
What Makes Up a Fix and Flip Loan?
When real estate investors gear up for their next project – they can leverage plenty of options. Typically, when you choose a private money loan or a standard bank mortgage loan, there are a few things you have to remember.
Ideal financing options for real estate investors revolve around fix-and-flip loans from private lenders and 203K loans. What’s the difference between the two? The 203K loan is a traditional mortgage loan with FHA backing and caters to flippers that specialize in construction financing or rehab projects.
On the other hand, a private lender backs a private money-based fix and flip loan. In this case, you don’t have to deal with a bank. A 203K loan comes with a 30-year term and an average APR rating of 3.3%-3.8%. Ultimately, you owe points to the lender to cover total origination costs. Mostly, real estate investors have to put down a 3.5% down payment of the total cost.
Mechanics of a Fix and Flip Loan
When you work with a fix-and-flip money lender, real estate investors have to provide more upfront capital for a project. Usually, a loan from a private money option can finance 80%-85% of the project cost. And real estate investors have to cover the rest of the upfront cost of 15%-20%.
However, real estate investors understand that interest rates are bound to vary and can be from 8% to 12%. In addition, the terms and conditions of private money loans are short and adjusted to support fixed and flip-based projects with specific timeframes.
When you compare private money with 203K loan options, each has its own approval underwriting policies and approval metrics and requires different eligibility requirements. Objectively, the private money option is more flexible and features a simpler and easier lending process, and takes less resources and time than dealing with traditional banks.
At its core, you can structure fix-and-flip loans in more than one way. Whether it’s a credit line or loan term – depends on the financing needs and the lender. Nonetheless, understand that these types of loans are secured through the property you want to renovate or purchase in the first place.
In order to determine the funding value you’re qualified to get on a loan, lenders can use a standard after-repair value or loan-to-value ratio.
Fundamental Differences between Fix and Flip Loans and Renovation loans, Construction Loans, and Home Loans
Typically, construction-based loans are loans that can cover the development cost of a new house from scratch. Conversely, a renovation loan comes into play when you need financing to remodel the house. The fundamental difference between a fix and flip loan and a renovation loan is that the latter is solely structured to get financing for renovations and does not provide financing to buy a real estate property.
When it comes to home loans, they’re designed for borrowers to buy a primary estate. Home loans come with a 30-year term and feature lower rates than the standard fix and flip loans. However, home loans don’t cover the financing of a property renovation.
Suitability of Fix and Flip Loans for Beginners
Fix and flip loans are a great option for beginners. In fact, these loans influence beginners to invest more in real estate properties. Conversely, fix-and-flip loans couldn’t be perfect for experienced real estate investors looking to invest in new projects.
When flipping houses, you can opt for hard money to finance various projects. However, to find hard money lenders, you have to connect with lenders on an established platform like Diggifi. Before you flip a property, be realistic about the estate’s condition and determine whether or not it is worth it to make new changes.
You need a clear vision of the finished house before you dive into the loan approval process. After you conduct some research and take an objective look at the project, you should be able to make a logical and calculated decision.
Remember, flipping houses’ costs can fluctuate. Before you dive into fix and flip loans, learn about the local market extensively. And reach out to other flippers that have had a great experience. You can depend on experienced property flippers for guidance and to learn more information.
What are the Essential Types of Loans for Fix and Flip Businesses?
Businesses can get several types of fix-and-flip loans. A hard money loan is the standard option to secure fix and flip funding and buy a real estate property. But you can also opt for home equity loans and personal loans.
Benefits of Fix and Flip Loans
Fix and flip lenders help beginners and seasonal players to get funding. There are several ways to utilize flip homes and investors are not often aware of the full extent of the benefits.
- Quick Approval
One of the perks of these loans is that they’re processed and approved faster than traditional bank loans. And when you’re able to avail fix and flip loan, it makes it easier for the investor to acquire a specific property. And this proves to be even more critical in a competitive real estate market. Since fix and flip loans are approved quickly – they have a faster closing period than other conventional loan options.
- Flexible Terms
One of the hallmark aspects of flip loans is that they’re highly compact and suitable for diverse investors that value flexibility. Typically, when you get a loan from a bank or a credit union, it propels you to follow rigid rules, regulations, and processes.
Not to mention, it takes more time and effort to get approval on these loans. Conversely, flip loans are highly flexible since there is no bank involved. As a result, flip loans come with fewer stipulations and requirements.
- Pre-payment Penalties and Bad Credit Eligibility
Typically, paying off the loan before it matures means getting penalized by traditional lenders. But these repayment penalties are usually non-existent when it comes to fix and flip financing. Moreover, you can get a fix and flip funding even on bad credit. Since fix and flip funding is approved for investors with bad credit, it makes one of the best real estate investment options to make money.
- Different Eligible Properties
A wide range of real estate properties is eligible to get fix-and-flip funding. Whether it’s a commercial or residential property, a lot depends on the condition of the estate to get approval. So, if you intend to fix a particular property, it is better to opt for fix and flip funding rather than seek out a traditional bank loan or credit union options.
- Control the Buyer’s Mortgage Rate
With fix and flip funding, you can contract, repair, or acquire the property. And unlike conventional lending options, fix and flip funding features lower interest rates. It also makes it possible to offer the interested buyer a more suitable price, which sells the property faster.
How to Avail a Fix and Flip Loan
Oftentimes, it can be challenging to get a fix and flip loan when you’re new to the industry. Once you build experience over time, qualifying for the best loan options becomes easier.
Here are simple steps you can take to get approval on a loan:
Step # 1 – Determine Your Finance Needs
Collect all the relevant information about a flip project and then determine the scope of the project and suitable time frame to estimate costs. Once you have a good idea about the total cost of a project, you can determine how much funding you need.
Step #2 – Assess Your Eligibility
It is not enough to have a clear idea about the financing you require – you have to review your credit score and annual revenue. And this information will help you figure out a fix and flip loans you’re eligible for. If you’re a beginner, you will likely depend on your financial and credit history to get the fix and flip financing. Experienced flippers usually use their strong business financials and flipping portfolios to get loan approval easily.
Step #3 – Choose a Suitable Lender
Depending on the financing you require, project details, and qualifications, the “right” lender for a loan is bound to vary. Choosing an ideal lender comes down to a lot of factors. The best course of action for investors is to research and perform a comparative analysis of multiple lenders to choose the one offering the most competitive terms and rates. Make sure the lender has the experience and understands changing dynamics of the house-flipping landscape.
Considerations to Get an Approval for a Fix and Flip Loan
Take into account these considerations to improve your overall chances of getting approved faster for a fix and flip loan:
- Establish a Solid House Flipping Plan
- Improve Your Existing Credit Score
- Review and Understand the Total Costs of House Flipping
- Plan and Act Based on a Specific Fix and Flip Real Estate Property
Fix and Flip Type of Loan: What Should be Your Approach?
Today, running a flipping business is not so different from house-flipping reality shows. The truth is that it takes a lot of effort, capital, and time to flip real estate properties. Still, when you get the prompt funding that suits your situation and needs, flipping housing units becomes a highly rewarding and lucrative venture. Like any loan, perform thorough research, anticipate challenges ahead of the road, and make decisions to fulfill business goals.
Final Thoughts
Fix and flip loans are ideal for getting direct access to real estate properties that require renovation before selling off at a higher profit margin. The good news is that a variety of platforms offer these loans to beginners.
Consequently, it creates more wiggle room for real estate investors to make the most out of flipping houses. It would be fair to state that fix-and-flip loans come with many opportunities for real estate investors. It allows investors to hold onto properties to get the capital and renovate or develop the property for a higher profit sell-off.
Typically, the total cost associated with a fix-and-flip loan on a property is an obstacle for many folks, but a fix-and-flip loan cuts out that hurdle and offers a straightforward option to fund a project.
Enter: Diggifi
Getting fix and flip loans becomes easy when you can access a nationwide lender network like Diggifi. With Diggifi’s app, the dedicated lender network ensures people get the best possible terms. Using Diggifi, a FinTech platform, you can finance 1-10 unit real estate investment and construction projects. You can also count on fantastic vendor management and comprehensive project management and scheduling tools.
Check out the Diggifi app now.