Home flipping is an incredibly effective way to generate returns through real estate, and an even better way for beginners to get their foot in the door to the world of real estate investing. The returns from a fix and flip investment serve as the perfect launchpad for other, more permanent investment opportunities. When it comes to financing a fix and flip investment, however, you should understand that you have a number of options. Aside from traditional mortgage loans, there are also programs available that can better fit the needs of your project. Continue reading as we explore some of the financing options available and how you may be able to utilize one for your next investment.
The Basics of Home Flipping
Let’s start with a quick overview of what a fix and flip investment entails. Home flipping involves purchasing a distressed or undervalued property with the intention of making renovations to increase its value, before shortly reselling for a profit. Flipping can be very lucrative, but you will need to do your due diligence to plan your project effectively and find properties that are worth flipping. This step is crucial because the longer you take to complete renovations and sell the property, the more you will incur in monthly holding costs. You will also need to be confident in your ability to sell the property once renovations are completed, otherwise you may be forced to pivot your exit strategy.
Financing Options for Home Flips
In order to find the best financing program for your investment project, you should fully understand the options available to you:
- Traditional loans: This is what you commonly think of when you hear the term “home loan”. These are 15 or 30-year mortgages issued by banks and credit unions, often with competitive interest rates. The downside is these loans do not provide funds for renovations, and the loan period is not very suitable for a short-term project like a fix and flip. They also tend to have strict criteria for the property being borrowed on, which means your distressed property may not qualify for financing.
- Private lending: Another option is seeking out a loan from a private entity as opposed to a bank. The main benefit of going this route is the additional flexibility provided. Unlike mortgage loans the application process will be less extensive, and you can work with your lender to tailor loan terms to your project. This allows you to eliminate any unnecessary expenses related to the loan, saving you money. The added speed also lets investors secure lucrative, time-sensitive opportunities that would not have otherwise been available to them.
- Hard money: Hard money loans are a type of private financing offered by companies that operate in the real estate space. These loans offer many of the same benefits as private lending, but with the added knowledge and resources of a real estate lender in your corner. They may be able to offer you advice or professional connections that will make all difference in your project. Additionally, most lenders offer short-term programs specifically designed for flipping which include funds for renovations on top of acquisition costs.
Generally, a private loan will be the preferred option for a fix and flip investment. The flexibility and shorter terms make more sense when you are repairing and reselling a property shortly after acquiring it. However, you should know that these short-term loans also tend to come with higher interest rates than their long-term counterparts. Be sure to take these costs into consideration when determining the budget for your project.
Securing Your Loan
It will help to have all your ducks in a row before you start applying for financing. Be prepared with information on the property in question, as well as detailed documentation on your personal finances. Lenders will generally want to see your tax returns, bank statements, and proof of income if applicable. They will also want to see that you have a comprehensive plan for the project, including a detailed and accurate budget, and a timeline. This will let the lender know that you are fully prepared to execute the project, increasing your likelihood of loan approval.
There is also something to be said about having a go-to lender for your financing needs and building a relationship with them over time. Once you have already gone through the financing process with a lender, you may gain access to a streamlined application process in the future. As you continue to build the relationship and gain experience in the world of real estate, you can leverage this to negotiate more favorable terms for your future projects.
Interest Rates and Repayment Terms
It is also important that you understand the finer details regarding your loan’s interest rates and repayment terms. With a traditional loan, interest rates are very competitive but there often isn’t much flexibility in terms of structuring a repayment plan. When using a private loan, you can work with your chosen lender to build a plan that makes sense for your project, which can save you money. This can be very beneficial in a fix and flip since it is not a typical home buying scenario. The tradeoff is that these loans typically have higher interest rates due to the elevated risk and shorter timeline associated with such a loan. Be sure to compare various financing options so you can find one that makes the most sense for your project.
Pitfalls to Avoid
Finally, we want to discuss some of the most common pitfalls associated with fix and flip financing, and some tips for avoiding them. Your biggest concerns will be exceeding your budget calculations, as this directly affects your profitability, and trouble offloading the property. The good news is that many of these risks can be avoided through careful due diligence. You should take the time to find a good property that’s in a high demand area, as this will not only help you sell quicker but also at a higher price. For renovations, you should choose cost effective updates that maximize property value rather than ones that fit your personal tastes. It may also be a good idea to leave an extra 10% buffer in your budget calculations to ensure profitability and cover any unexpected costs that may arise.
Last but not least, you should take the time to select a trustworthy financing partner with a history of delivering funding for real estate projects. Having a reliable financing lender in your corner means a smoother funding experience so you can focus on what really matters, your real estate project.
The easiest way to save on your next investment is to obtain financing from a real estate lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are looking to finance a home flip, RCN Capital has competitive loan options available.