Choosing the right financing can be the toughest part of embarking on a fix and flip venture. Unlike buying a home for yourself or renting out property, the fix and flip business usually requires different financing options and an entirely different strategy to be successful. These are the main ways to finance a fix and flip venture and how to determine which one is right for you.
Bank loans are the traditional finance option for buying homes. A bank loan for a fix and flip home is much the same as a traditional mortgage and just like a traditional mortgage, obtaining one can be tricky. Many know all too well the anxiety banks had about lending after the 2008 housing market bubble burst. However, within the last few years credit restrictions are loosening up which makes obtaining a loan easier than it’s been in the past decade. These loans are ideal because they have the lowest interest rate, but they are much more difficult to acquire. Banks give out fix and flip loans cautiously and are usually reserved for businesses–not individuals–with a proven record of successful fix and flip sales. In order to earn a loan from the bank, you need stellar credit and no history of bankruptcies or foreclosures.
Hard Money Loans
The hard money loan is commonly reserved for first time or novice house flippers. That’s because these loans don’t require the same qualifications as more complex loans from banks or other lenders. Hard money lenders are usually made up of a collection of private lenders who are interested in profiting off of your investment. Unlike banks, hard money lenders invest based on the property you want to flip and less about financial prerequisites. Lenders also give out these loans fast. If you find a property you want to buy right away, a hard money loan may take only a few days while a bank loan can take months. You can find hard money loans based on your region, like California hard money loans. The downside? These loans come with steep interest rates. It’s not uncommon to receive a loan with anywhere from an 8-16% interest rate. With a typical one-year turnaround time, these loans require you to sell fast in order to make a profit and avoid penalties. The loan is paid with the proceeds from the sale of the home. Up until then, you only pay monthly interest payments. If you price your home higher than the interest price or bid lower for the home you want to invest in, this can be an excellent option.
Online mortgage lenders are gaining traction in the housing market and building a reputation as being fast and efficient loan options. These are direct lenders that use technology to make quick, no-fuss credit and risk assessments entirely through online applications. Online mortgage lenders have the ability to lend nationally and can get loans approved in minutes and funded within two weeks. Like hard money loans, online mortgages typically have a higher interest rate– between 7-12%– and need to be paid within a year.