What Are Fix And Flip Loans? A Beginner’s Guide

Jun 21, 2022 | Mortgage

If you’re looking to make some money in real estate, fix and flip may be a good place to start evaluating the feasibility of your next project. We all are familiar with conventional residential loans, but the investment property loan sector was in need of a separate loan structure.

In this guide, we’ll explain everything you need to know about fix and flip loans for beginners so that you can make an informed decision on whether they’re the right investment for you.

What Are Fix And Flip Loans?

A fix and flip loan is a type of short-term loan used to finance the purchase and renovation of a property so as to make a profit off its sale, typically within 12 to 18 months. These loans are often used to purchase residential properties and are also sometimes called rehab loans or flip loans.

The typical term for a fix and flip loan is six months to one year, although some lenders will offer terms as long as two years. This type of loan is designed to be paid off quickly, once the property is sold. Most fix and flip loans are cash from a personal line of credit or a short-term loan from a private lender.

Fix and flip funding has two elements: the purchase and the funds set aside for the renovation.

Pros of Fix and Flip Loans

There are a number of reasons why fix and flip loans can be attractive to investors, such as:

1. Quick turnaround time: The goal with a fix and flip loan is to sell the property quickly, for this reason, the timeline for these types of loans is much shorter than a traditional mortgage. This can be appealing to investors who want to minimize the amount of time they have money tied up in a property.

2. Less paperwork: Fix and flip loans often have less paperwork and requirements than a traditional mortgage. This can make the process of getting a loan much simpler and quicker.

3. High Loan-to-Value (LTV) Ratios: Lenders who offer fix and flip loans often offer higher loan-to-value ratios than traditional lenders. This means that you can borrow a larger amount of money relative to the value of the property.

4. Interest-only payments: Some fix and flip loans offer interest-only payments, which can help investors save money in the early stages of a project when cash flow is typically tight.

5. Flexible repayment options: Some lenders offer flexible repayment options, such as the ability to make interest-only payments or payments based on the amount of money you’ve borrowed, rather than a set monthly payment. This can give investors more flexibility when it comes to managing their cash flow.

Cons of Fix and Flip Loans

Of course, there are also some potential downsides to fix and flip loans that investors should be aware of, such as:

1. High-interest rates: Because fix and flip loans are considered to be high-risk, they often come with higher interest rates than traditional mortgages. This can add a significant amount of money to the cost of a project.

2. Short repayment timelines: The short repayment timeline associated with fix and flip loans can be a challenge for investors, especially if the property takes longer to sell than expected. This can put pressure on an investor’s cash flow and make it difficult to pay back the loan.

3. Limited availability: Fix and flip loans are not offered by all lenders, so they may be difficult to find. Additionally, some lenders only offer fix and flip loans to experienced investors.

4. Requires experience: Fix and flip loans often require a higher level of experience than other types of loans, such as traditional mortgages. This is because the process of renovating a property can be complex and time-consuming.

5. High costs: Fix and flip loans can be expensive, due to the high-interest rates and fees associated with them. Additionally, the cost of renovating a property can add up quickly.

Fix And Flip Vs Traditional Home Loans

Traditional home loans and fix and flip loans are farther apart than you may think. House flipping loans are meant to renovate and resell a property within a short period. On the other hand, conventional home loans are made available to help the borrower buy a home for long-term use.

Duration: 6-18 months vs. 15-30 years

Interest Rates: 12%-18% vs 2%-4%

Purpose: Short-term Investment vs. Long-term Residence

Collateral: The Property Invested In vs. Borrower’s Personal Credit

Fix And Flip Vs Construction Loans

Most fix and flip projects you’ll come across involve some construction. The fix and flip loan takes care of that in the case of a rehab. In contrast to a flip loan, a construction loan is meant for building new properties or bringing down an existing structure for complete reconstruction.

Differences aside, both loan schemes share numerous processes and terms. This is because both flip loans and construction loans are mostly funded by hard money loans. The flexibility and quick availability of such loans suit both well.

The Purchase Process

Now that you know what fix and flip loans are, it’s time to take a closer look at how the purchase process works.

The first step is finding a property that you think has potential. Once you’ve settled on a property, the next step is to make an offer.

If your offer is accepted, you’ll need to get a loan to finance the purchase and renovation of the property. Getting fix and flip loans for new investors can be a bit more difficult.

If you’re going to be using a fix and flip loan, you’ll need to size the total loan amount so that it covers both the purchase price of the property (Loan-to-Value or LTV) and the estimated costs of the renovation (Loan-to-Cost or LTC).

After your loan is approved, you conclude the purchase by funding the down payment while the lender funds the rest of the purchase price. This is how fix and flip financing works.

The Rehab Process

Once you’ve completed the purchase, it’s time to start working on the renovation.

The first step is to develop a renovation plan. This plan should include a detailed budget and schedule. Once you have a plan in place, it’s time to start the actual work.

In general, fix and flip lenders expect you to fund the cost of labor and materials. After the completion of a phase of the project, you can ask the lender for a “construction draw.” This means that the lender will release funds to you as reimbursement.

Before the reimbursement is released, an inspector from the lender will inspect the property. This can take up to 72 hours after you submit a request. While you wait for the release of funds, you can move ahead with the project if you have enough cash to pay for extra materials and labor.

For fix and flip loans, the investor has to be skilled at managing the financing for flipping houses (or construction draws), the contractors on site and the materials.

Contact Thrive Lending For More on Fix And Flip Loans

If you’re interested in learning more about fix and flip loans, contact Thrive Lending today. At Thrive Lending, we prioritize you and your needs, and we define our success as your success. We see lending as a means to improve your bottom line by taking calculated financial risks in order to assist you in achieving profitability. Contact us today at 949-228-9902 to get started.