Fix & Flip Loans: How to Finance Your Next Real Estate Project

A fix & flip loan is designed to fund the majority of both the purchase and the renovation costs of distressed real estate property. They offer relatively short-term borrowing at an agreed rate of interest, allowing investors to fund such a project without the need to have a vast investment pot. 

When most people think about this kind of borrowing, it’s generally the type offered by what’s termed a “hard money lender”, which is significantly different from the loans from banks and regular mortgage providers. However, there are also some other more mainstream lending options that might be suitable for a fix & flip purchase that are also worth knowing about.

Everything You Need to Know About Fix & Flip Loans

• What is a hard money lender?
• What is a fix & flip loan?
• How do fix & flip loans work?

What is a hard money lender?

The big difference between a hard money lender and banks (or other financial institutions) is that any money borrowed is secured against a tangible asset. In the case of a fix & flip loan, that asset is the property. The borrower’s income and financial status are not a key element of such a loan being approved.

Hard money lenders are usually backed by private equity. Because of the reduced or negated need to carry out credit checks and scrutinize tax returns, these loans are often agreed upon in a very short period—even as little as a couple of weeks or less.

This makes them extremely popular for real estate financing, for those with a less-than-perfect credit rating, or for those who’ve already taken on a large amount of borrowing and would, therefore, not be eligible for additional mainstream lending.

What is a fix & flip loan?

A fix & flip loan is short-term borrowing specifically to purchase a property with the intention to renovate and sell it for a profit. The amount borrowed will cover much of the purchase price and renovation costs. Typically, borrowers will be able to negotiate up to 75% of the after-repair-value (ARV)—that is, the estimated value of the property once all the renovations have been carried out—and have available funds to cover the rest.

This type of borrowing is known as “interest-only” lending. This means that while the loan is active, monthly repayments will only cover the interest owed, not the outstanding amount. When the renovated property is sold, the outstanding amount is paid back from the sale price. What’s left over is the profit.

How do fix & flip loans work?

Fix & flip loans are split into two sectors:

1. The cost to purchase the property.
2. The costs to renovate the property. 

Once a loan has been agreed, the money is provided in phases—the initial purchase sum and then, once work has commenced, amounts will be released as and when each pre-agreed sector is completed.

Because of the way such a loan works, one stipulation that every hard money lender will require is something known as a Scope of Work (SOW). This is a detailed business plan that provides an accurate blueprint of each renovation phase, each with the associated costs.

Each of these will be overseen by an inspector provided by the money lender. They are responsible for confirming that each phase has been successfully completed before allowing access to the next pre-agreed funding from the loan.

At the end of the process, the property is marketed, sold, and the loan is paid back to the lender along with any outstanding interest.

Real Estate Financing with Fix & Flip Loans: FAQs

• Who should consider a fix & flip loan?
• What are the 3 steps to a successful fix & flip project?
• What are the requirements for a fix & flip loan?
• Are there any other real estate financing options for a fix & flip?

Who should consider a fix & flip loan?

Fix & flip loans are suitable for many investors, especially those who can’t access funding via more mainstream avenues. They are specifically for those who want to buy a distressed property, renovate it, and sell it at a profit.

This is not to be confused with the buy, renovate, rent, refinance, repeat (BRRRR) model that involves building a portfolio of tenanted properties.

When considering a fix & flip loan, it can’t be reiterated enough that a successful project is directly impacted by the planning and research. This can be divided into 3 steps, each of which holds equal importance.

What are the 3 steps to a successful fix & flip project?

Property investment, be it a renovation project, BRRRR, a fix & hold, or any other method of making money through bricks & mortar, is driven by the quality of the preparation.

This can be broken down into 3 key stages: research, planning, and partnering with the right money lender.

1: Research: This is one of the fundamental building blocks that sets up a successful project. It should include in-depth research into the locality of the intended real estate. What are the current property values? What’s the average annual increase? What is the demand for property and is there anything that might drive this to change? For instance, is there a large corporation planning to move to the area (and, thus, drive up employment) or a significant investment into infrastructure that will make the region more attractive to buyers?

Other important aspects to consider include:

• The property location.
• The type of property (single property, multi-dwelling, etc.).
• The condition of the property.
• It’s resale value post-renovation.
• Careful budget consideration. This will be driven by the purchase price, renovation costs, and a realistic sale value.

2: Planning: Creating an accurate plan is the culmination of all the above research. Once again, this is a key stage and should include:

• The scope of work to be carried out on the pinpointed property.
• The timeline of work and associated budget for each stage.
• The exit strategy.

3: Partnering with the right money lender: Any hard money lender will need to see that their money is in safe hands—and accurately following the above two stages is proof that this is the case. It’s vital to borrow from the right company. There are many hard money lenders out there, but not all are created equal. Clarity and communication are what’s important here—and this is a two-way street.

Borrowers should be sure to:

• Fully understand the lending process.
• Have clarity about timelines (with built-in buffers—real estate renovation has a habit of throwing curve balls into the mix).
• Feel comfortable about the transparency of the borrowing.

What are the requirements for a fix & flip loan?

While borrowing from a hard money lender is by no means as complex as financing through a bank it still needs to represent responsible lending.

Typically, to be approved borrowers will need to:

• Provide financial details of the purchase value, renovation costs, and ARV.
• Have drawn up a business plan that shows each phase of the rehab, costs involved, and a realistic timeline.
• Obtain an official appraisal of the property’s current value.
• Provide proof of funds for the additional costs outside of the borrowing amount. This is typically anything from 25% upwards of the total purchase and renovation costs.

Depending on the lender, this might require the borrower to pass some kind of credit check. However, even if this is the case, the score is generally far lower than might be needed to secure lending from a mainstream financial institution.

Are there any other real estate financing options for a fix & flip?

Yes, there are many other ways to finance such a purchase. As well as borrowing from a hard money lender, the following are also options:

• A personal loan: This might be a consideration for those who only need a minimal amount of money to finance the property purchase and renovation costs. It’s not really an option if a larger percentage of funding is required.
• IRA/401(k) loan: Many people put their retirement savings to work, although this is generally most suitable for those who are not yet approaching the time to give up work entirely. Borrowing from such a source can be an option, with the profit made from the fix & flip going back into the pot to boost the value.
• Seller financing: This is where the vendor acts as the money lender. The monthly payments and interest are made directly back to them, with the outstanding amount paid back when the property is sold.
• Home equity line of credit (HELOC): For those who have equity in their main residence (usually a minimum of 15%), it’s possible to draw on this in a credit-card-style agreement. The existing mortgage lender will agree on the maximum amount to be borrowed. This can be drawn on and used as needed—although there will be a minimum amount to be paid back each month. The terms of the loan will be agreed upon at the beginning (typically anything from 5-10 years), after which no more money can be drawn. However, a longer period is generally agreed to pay back the money—often as long as 20 years. Interest is only paid on the amount borrowed.

A HELOC is secured on the property, so it’s important to understand that payment defaults risk foreclosure. Every lender has different terms, making it vital to be aware of everything—from minimum payments, overpayment options, associated fees, and other small print details.

The hard money lender option is what most people think of when they hear the term fix & flip. This is the preferred borrowing for many real estate investors, thanks to the flexibility and less stringent requirements. However, securing the right funding for a real estate project will depend on individual needs. It’s highly advised that potential borrowers take advice from a legal/financial advisor before signing any loan agreement.

Contact BRRRR Loans Today and Discover Why We’re Fast Becoming the Go-To Lender for Fix & Flip Loans and Real Estate Financing Options

Whether you’re ready to secure financing for your next real estate project or just want to find out more about the art of the possible, BRRRR Loans is here to help. We not only offer some of the most attractive rates and fastest closing in the business, but our model is tailor-designed to help both novice and experienced investors fast-track their real estate efforts. 

Discover more at https://www.brrrr.com/loan-programs/flip-fix-loans and call us today for a no-obligation discussion.