Popular HGTV shows such as “Flip or Flop” and “Flip It to Win It” might give the impression that fixing up a house and making money off it is simple — all you need is a little home improvement funding, and suddenly you can turn a profit.
Real life, though, isn’t so simple. In fact, you could lose money if you aren’t careful when managing your project, warned Daniel Sasson, a real estate agent and home flipper.
Fix and flip loans can be a way to ease the process, but before you borrow, here’s what you need to know.
What are fix and flip loans?
Unlike a conventional mortgage — which is a long-term loan made by a traditional financial institution for a house you plan to live in — fix and flip loans are for a short duration and often are made outside the traditional financing system.
“In many cases, a fix and flip loan is issued by a private investor or business as a hard money loan,” said Sasson, who works at Florida Cash for Home. “They are typically short-term loans meant to be used on a property you’re fixing up with the intention to sell for a profit.”
Here’s what you can expect when you get a fix and flip loan:
- Typical term length: Six to 12 months
- Interest rate: 12% to 21%, although you might get a lower rate
- Points (a type of fee): Between 3% and 6% of the loan amount
- Required documentation: Little, or sometimes none
- Loan amount: Usually between 60% and 75% of the property’s value
Here’s how fix and flip loans compare with regular home loans.
|Fix and flip loans vs. conventional mortgages|
|Fix and flip loans||Conventional mortgages|
|Term length||Usually 6 – 12 months||Usually 15 – 30 years|
|Credit check required||No||Yes|
|Income documentation required||No||Yes|
|Interest rate||Usually 12% – 21%||Currently 4% – 5%|
|Down payment||Up to 40%||As low as 0%|
Advantages of fix and flip loans
Because speed is the most important aspect of flipping properties, the fact that you can have your money in under a week is the biggest advantage of a fix and flip loan, according to John Blackman, a real estate agent with Heart of Austin Homes Team.
“Bank loans generally take 30 days to underwrite,” said Blackman. “A good flip should be complete in 30 to 60 days, so you drastically impact your return on investment when you have to wait for a lender.”
Also, many hard money lenders won’t worry about your debt-to-income ratio, credit score, or even your income, said Lucas Machado, the president of house-flipping company House Heroes. And, you don’t have to worry about the current value of the home because the property is expected to be in poor condition.
“Hard money lenders decide whether to make the loan based on the strength of the deal,” said Machado. “If the numbers are profitable and the borrower seems trustworthy, they’ll make the loan.”
Downsides to fix and flip loans
A fix and flip product can be a great loan for real estate investing, but it has some drawbacks.
Higher interest rates and shorter terms can make it difficult for inexperienced flippers to make a profit, according to Machado. Plus, even though these loans come with less bureaucratic red tape, you’ll lose the home if you default on the loan. In fact, hard money lenders might move to repossess the fixer-upper faster than a traditional bank would — and finish the job and sell the property themselves.
One way to offset the disadvantage that comes with inexperience is to work with a partner.
“Starting with an experienced associate can help you get the funding with better terms since many lenders will look at your level of experience before issuing the loan,” said Machado. “After you’ve done a few deals this way, you’ll have the experience to get the funding on your own.”
Using a line of credit
If you don’t want to secure funding using property, it’s possible to get a personal loan of up to $100,000 to cover your costs, Blackman pointed out. However, you’ll face more stringent credit and income requirements.
But if you have good credit and adequate income, low-cost personal loans can save you money on interest while getting the funds in your bank account quickly.
The best situation could be getting an unsecured line of credit you can use for fixing and flipping. With a line of credit, you don’t have to keep applying for loans when you move on to a new property.
“If you can show enough income and success with a flipping business, a bank might issue you a line of credit,” said Blackman. “But this arrangement is much harder to get than a hard money loan or even a personal loan.”
How to decide if a fix and flip loan is right for you
Before you decide to use a fix and flip loan to invest in a property, Sasson recommended asking yourself these four questions.
- How much below the market value can you pay for the property? The bigger the difference between the amount you pay and the current value of the home, the better off you’ll be. Consider foreclosures and other bank-owned properties to get the best deals.
- How much will it cost you to repair the property to salable condition? Before deciding on a property, get quotes from general contractors about estimated costs. In many cases, however, home repairs often take longer and cost more than you expect. Do your best to account for that reality.
- What will you pay in interest and fees on the loan until you can sell the property? This amount can be a little hard to calculate since you can’t be sure about exactly when you’ll sell the property and pay off the loan. However, you can use our personal loan calculator to get an idea of where you stand on interest with a short-term loan.
- How much money can you realistically sell the home for and will it be enough to provide a profit? Research the local real estate market to see the price of similar homes sold in the area. A good real estate agent or experienced flipping partner can help you decide if your profit will be large enough after all the costs associated with the loan are paid.
“Run the numbers to see if fix and flip loans really are a good fit for you,” said Sasson. “Your best results will be if you can get a property for way below market value and you can turn it around quickly to sell it at the new, increased market value.”
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|