What are Fix and Flip Loans?

There is good money to be made in flipping houses, if you do it well, but there can be a financial barrier to getting started. Conventional mortgages were designed for long-term residences, which makes them ill-suited to investment property loans. As more investors entered the market to flip old properties, a new loan model was needed. The fix and flip loan was designed to fill that gap.

What are Fix and Flip Loans?

Fix and flip loans are short-term, real estate loans designed to help an investor purchase and renovate a property in order to sell it at a profit—generally within 12 to 18 months. Some investors use more conventional loans and lines of credit to finance their projects, but most fix and flip loans are hard money loans from individuals or private investors.

Fix and flip loans are most often used to purchase residential properties at auction or foreclosure, to finance renovations and upgrades, and to cover other expenses associated with the ownership of the property.

loan for fix and flip

Fix and Flip vs. Traditional Home Loans

Traditional home loans and hard money fix and flip loans are both real estate loans, but they’re more different than they are alike:

Hard money fix and flip loansTraditional home loans
Duration6 to 18 months15 to 30 years
Interest rates12 to 18%2 to 4%
PurposeShort-term investmentLong-term residence
CollateralThe property in questionBorrower’s personal credit and property

Fix and flip loans are designed to do exactly what they’re named for: renovating and reselling a property in a short time period. Traditional home loans are long-term investments designed to help the borrower purchase a home that will serve them for decades.

Fix and Flip vs. Construction Loans

If you plan to do some construction while flipping a house, do you need a construction loan? What’s the difference?

Most flips involve some construction, and fix and flip loan funds can be used for all of those needs. A new construction loan, by contrast, is generally used for building entirely new residential or commercial properties, or for razing an existing building for all-new construction.

Despite the difference, many of the terms and processes are the same for both fix and flip loans and construction loans. That’s because the best option for both is often a hard money loan. As with flipping houses, new construction opportunities benefit from the flexibility and speed of hard money loans.

construction plans for loan

Advantages of a Fix and Flip Loan

It’s hard to overstate the advantages of a hard money fix and flip loan for investment properties.

  1. Fast funding — Investors bidding on foreclosures or auctioned properties need to have cash-on-hand quickly. Traditional home loans can take a month to process and deliver, but hard money fix and flip loans can provide funds within the week.
  2. Flexible terms — Hard money fix and flip loans from private investors are not tied to the same rigid structures, processes, and requirements as traditional banking institutions. Borrowers who don’t qualify for traditional loans can often still work with a hard money lender.
  3. Less risk — A traditional home loan is backed by your personal credit and property, but a hard money loan is backed only by the property for which it was granted. If the worst does happen, you won’t lose your home.

It’s no surprise that hard money fix and flip loans are powering so much of the real estate renovation industry, but there are also advantages to investors as well:

  1. Diversified portfolios — Especially in seasons when the real estate marketing is doing well, fix and flip loans are a great way for investors to diversify their portfolios.
  2. Security — Real estate is a secure investment in general. In the case of a fix and flip loan, the property is the security. If the borrower should default, the lender can possess the property and potentially work with another flipper to get it back on the market.
  3. Short terms — Most property flips are completed in 12 to 18 months, which means lenders can see the return on their investments relatively quickly.

When a visionary lender and a talented flipper come together, hard money fix and flip loans become the vehicle to everyone’s success.

Disadvantages of a Fix and Flip Loan

The only time a fix and flip loan might be to a borrower’s (or a lender’s) disadvantage is if the flip takes significantly more time than planned. Hard money fix and flip loans come with a relatively high interest rate, because they are intended for short life spans. If renovations take longer than expected, however, or if a completed project sits on the market for too long, those higher interest rates can start to become a burden on the borrower.

fix flip open house

6 Types of Fix and Flip Financing

There are six types of financing that borrowers can use to flip a property:

  1. Hard money fix and flip loans from a private investment group like Loan Ranger Capital.
  2. Crowdfunding from specialized websites, which offer a kind of hard money loan with (usually) less flexibility.
  3. Individual lenders who offer hard money loans from their own resources.
  4. Home equity loans (HEL) or home equity lines of credit (HELOC) from traditional institutions offer some options, but are less flexible and less generous.
  5. A cash-out refinance from a traditional bank will provide some extra funds by, essentially, remortgaging your own home.
  6. An acquisition line of credit is similar to a HELOC, but requires greater personal security. These are often not viable options for newer flippers.

For details on each of these fix and flip financing options, and help determining which is best for your situation, see, 6 Funding Options and What You’ll Need to Get Financing. →

Tips for Getting a Fix and Flip Loan

The flexibility built into a hard money fix and flip loan is good news for borrowers, but it definitely doesn’t mean that lenders are handing cash to anyone who decides they want to try flipping houses. It also doesn’t mean that all fix and flip lenders are the same.

When you’re ready to get started, you’ll need to first find the right lender and then make sure they’re willing to invest in you.

  1. Find a local lender. An experienced lender in your area will be a true business partner. Someone with knowledge of the local market will understand real estate trends in your area and know contractors if you need help.
  2. Find a reliable lender. Find a lender with a portfolio. Ask other flippers in your area who they work with and who they recommend. You need a financial partner who can demonstrate their own success in identifying and financing successful flips.
  3. Ask about construction draws. Construction draws are the incremental drawing of funds from the approved loan amount to cover construction work being done on the property. Some hard money lenders may impose a “construction holdback,” which means the funds will not be released until work is in progress or completed. Make sure you know how quickly your chosen lender will release funds for construction work.
  4. Count the cost. Before you apply for a fix and flip loan, know how much you need. Flipping a house is about more than the purchase and the renovation costs. There are also carrying costs and marketing costs, and you’ll want to cushion the budget a bit. Work out all five categories of cost on paper so you can show your lender that you’ve done the homework.
  5. Schedule the project. Create a detailed schedule for the completion of your renovation. List the work to be done, when each stage will begin and end, and an estimate of what each portion will cost.
  6. Know what lenders look for. Hard money loans vary from lender to lender, so make sure you know what your chosen lender requires. What kind of insurance will you need? Do you need to establish an LLC? etc.

Getting Started with Fix and Flip Loans

The term “fix and flip loan” can refer to a number of different real estate loan and financing options, but among experienced flippers it is virtually synonymous with “hard money loan.” That’s because hard money fix and flip loans, unlike financing options from traditional banking institutions, were designed specifically for the fast-moving world of real estate flipping.

If you’re thinking about flipping your first property, start by learning the market and how to estimate costs. When you’re ready to jump in, find a local hard money lender with a good portfolio.

If you’re looking for financing options for your next flip, and you haven’t used a hard money lender before, you may be very pleasantly surprised at how much faster and easier the process can be. There are nation-wide hard money lenders, but local partners are usually best.

And if you’re in Texas, we’d love to talk about your project. Contact us today or apply online.

5 thoughts on “What are Fix and Flip Loans?”

  1. Looking for a fix and hold loan for a single family home in Lagrangeville NY purchase price $830k rehab $400k ARV $2,1million exit strategy refi into long term mortgage hold as a rental thanks

    Reply
  2. First time Fix & Flip borrower. I purchase a house for$350,000. The loan balance is $280,000. I’m asking for a loan of $120,000 to rehab. and then sell.

    Reply
  3. Do you do loans in MN? We are looking at a house in a highly desirable area. Owner has done electrical and plumbing updates. Needs roof. Property is very sound. Asking 75,000. Market Value is at 97,500. ARV 135,000+

    This would be our first flip!

    Reply

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