Everything You Should Know About Fix and Flip Loans

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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%
Funded quickly Yes No
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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.”

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Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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