Fix and Flip Loans: How Do They Work?

There are several ways of investing in real estate. If you want to make a profit quickly, flipping homes could be the best choice. You buy a distressed property, renovate it, and then sell it for 15-20% more. There are fix and flip loans that can help you finance your purchase. They are designed specifically for people who flip properties, so they cover not only the price of the home, but also the renovation costs.

The application process is easy, especially for people who have a good financial background or those who have successfully navigated several property deals. You simply sign up with your lender, finance your projects, and update your financial details once a year. Read on to find out more about hard money loans and how they can help you supercharge your flipping business.

Fix and Flip Loans: How Do They Work?

A fix and flip loan is designed for professional real estate investors who flip properties. It is unique because it doesn’t only cover a large percentage of the property’s price, but it also helps buyers pay for the repairs to the property. Investors usually use around 10-20% of their own money as a deposit to buy a 1-4 unit place, and they get a hard money loan for the rest. Before closing, they let their lender know how much the renovations are likely to cost.

The funds required to buy the property are made available immediately, but the money for the renovations is kept in a reserve fund. When the investor needs to pay contractors or purchase materials, they request draws from this fund. Once the property is fully rehabbed, the investor sells it for a profit, and the loan is paid back. This entire process usually takes less than six months.

Why Use this Loan?

If you’re a seasoned property investor and you’ve flipped several houses already, it’s likely that you have some cash to spare. So, why use a loan instead of paying for the property and the repairs yourself? Wouldn’t it be cheaper to finance the whole transaction without a mortgage?

The answer is that you can make a profit much faster when you use a loan, and you can purchase more than one property at a time. What’s more, the fix and flip loan isn’t as expensive as you might think at first because you won’t hold the property for very long, so there is no time for the interest to accumulate and compound.

You Make a Profit Faster

The main reason why so many people use loans when buying an investment property is that this speeds up the process. Instead of having to save 100% of the property’s value plus the money you need for renovations, you only have to save 10-20% of the price.

This means that you can get started much earlier, and you won’t risk having to put a project on pause because you’ve run out of funds. If you’re a new investor, it’s important to note that you might need to provide additional documentation when applying for a fix and flip loan, which is usually reserved for seasoned investors.

You Can Work on More Properties at the Same Time

People who invest in rental properties are mainly looking for long-term cashflow, so they don’t need to rush their purchases. But for those who flip houses, the speed and volume of transactions is what counts. The more flips you do, the more money you make. Buying each property outright is inefficient because you’re limiting the number of deals you can work on at any one time.

With loans, you can build up a significant profit much sooner because you can flip several properties at once. Since you’ll only be paying for a small fraction of the home with your own cash, you can take on multiple projects, even if you don’t have a massive amount of money available.

The Loans Are Cheap

At the moment, the average US mortgage costs between 6 and 7%. Fix and flip loans cost between 10 and 12%, so they are a little more expensive. This puts some people off, but they haven’t considered that the traditional mortgage is meant to be held for several decades, so the buyers pay hundreds of thousands of dollars in interest in total. A short-term loan is very different, and it won’t cost you much.

Even though the annual interest rate might be 10 or even 12%, you’ll only pay half of that if you flip your property within six months. For example, if the loan’s value is $500,000, you’ll pay between $25,000 and $30,000. Because you’ll have done up the property and increased its value, you can sell the home for up to 20% more than it was worth. This means that you can end up with a 10-15% profit. Not bad for a six-month project!

Why Use a Hard Money Lender?

Now that you know why financing your purchase is better than buying a property outright, you might wonder where to get your loan. A traditional bank isn’t a great option because the mortgages offered are targeted at long-term borrowers who would like to pay off their debt over 15-30 years. Fortunately, there are private companies that can help you access the right kind of loan.

A hard money lender offers loans that are secured by the property. These are mostly used by short-term real estate investors who would like to buy a property and sell it within a few months. The main advantage is that you’ll be able to access your money quickly and with minimal hassle, so your transaction won’t be delayed. What’s more, there are individualized options, so you’ll be able to find something that suits your situation.

What Are the Fix and Flip Options?

Here at Turning Point Lending, we offer several types of loans for people who flip properties. The cheapest ones are available at interest rates between 10 and 11%, and they are ideal for buyers who would like to complete their project within 12 months. The maximum loan-to-cost is 90%, but 100% of your renovation budget will be covered.

For people who would like to defer payments until they’ve started making a profit with real estate sales, the Deferred Interest Program could be suitable. These loans cost as little as 12% per year, and the maximum loan-to-cost is 80%. The loan term is nine months.

What Interest Rate Will I Get?

The above-named figures are the lowest interest rates we offer, and they are available to individuals with a good credit score and a reputation as reliable borrowers. If you’ve never flipped a home before or you’re not sure whether your credit rating is good, get in touch. We can help you access the best rate possible, and we can show you how to improve your credit score, so you’ll be able to get our top deals soon.

For decades, savvy investors have flipped homes for a profit. A single deal, which might take six to nine months, can yield a profit of over 10%. The easiest way to start is to get a hard money loan, which you can pay off when you sell the upgraded property to another buyer. Contact us at Turning Point Lending to find out more about the fix and flip loans we offer.