Everything You Need to Know About Financing Your Fix & Flip

Everything You Need to Know About Financing Your Fix & Flip

There are more and more investors getting into the business of home flipping in today’s market environment. With interest rates so high, rental property investing is becoming more difficult to justify, but a fix & flip project remains as appealing as ever. A smart investor can generate significant returns in a short amount of time, and for new investors flipping can be the perfect launchpad into other, larger investments. Securing financing for a fix & flip is a different story, since banks may not be willing to risk lending on a neglected property. In this piece, we discuss everything you need to know about financing a fix & flip so you can find success with your next real estate venture.

hand repairing house model next to jar full of money

Understanding the Basics of Fix & Flip Financing

As mentioned, securing appropriate financing for a home flip can be somewhat difficult. Not only are banks less willing to lend on older properties in need of repair, but their loan programs often do not provide funds for renovations, only acquisitions. On top of this, the typical 15 or 30-year life cycle of a mortgage doesn’t make much sense for flipping, where you’ll be reselling the property shortly after acquiring it. It’s important to consider different loan aspects like the loan period, interest rate, and the length of the approval process when comparing financing options. Let’s go over a few of the options you have for financing a fix & flip project.

Private Lenders

Private lending simply refers to people or organizations outside of traditional lenders that are willing to provide funds for investments. These can be people you know, or even organizations looking to expand their investment portfolios. The benefits of private lending include more flexibility in approval and with repayment terms, and generally faster speed of funding. Other loan terms can also be negotiated with the private party, and it’s possible to obtain an attractive interest rate. It can also be a good way for borrowers with less than stellar credit to secure funding.

Hard Money Lenders

A hard money loan is a type of financing that is secured by collateral, which is typically the property being financed. This gives a lender more security because in the case of a default, they can seize the property to recoup their losses. This also means hard money lenders are more flexible when it comes to loan terms, approval, and repayment. Loan approval is also faster, with funds being delivered in as little as two weeks after applying. You can work with a lender to build a program that fits your needs, and there are many lenders that operate in the real estate space with programs specifically designed for home flipping.

Traditional Bank Loans

Standard mortgage loans are an option for acquiring real estate, and they do have some benefits. Typically, these loans have the lowest interest rates available, but you are also locked in to a longer loan period as a result. It’s also possible to obtain down payment assistance with certain programs, but they often require the borrower to live in the property being financed. As for downsides, these loans have much stricter property criteria, and a longer application process that can take weeks or even months. They also will not provide funds to cover renovation costs.

Home Equity Loans and Lines of Credit

For home renovation projects that require large amounts of capital, a home equity loan can be a viable solution. Although they require you to have equity built in a property already, these loans also come with flexible use terms, and you are only limited by how much equity you have. These loans also come with very attractive interest rates. The only major downside is that you are at risk of losing your property if the project doesn’t go as planned. Due diligence becomes even more important if you are planning to use a HELOC for a home flip.

Government Loans/Programs

Additionally, there are federal loan programs that can help you finance your renovation project. These programs give investors access to low-interest financing options, but they are very limited in use-case. We already mentioned downpayment assistance programs, and these may be worth seeking out if you plan to live in the property for a period of time. There are also FHA 203(k) loans, which are government-backed financing programs intended for renovation projects. These loan can finance up to $35,000 of renovations, but will require you to hire a consultant from the U.S. HUD to oversee the project, and that you live in the property for at least a year.

Be sure to take time to look into any government programs that you may qualify for with your project. Understanding all the options you have available to you will allow you to make the best decision for your particular investment’s circumstances.

Tips for Securing the Best Financing

We want to end with some best practices for when you begin to apply for financing. There is nothing more important than having a solid business plan, as this shows preparation on your part and increases your likelihood of loan approval. For a home flip, this means a detailed renovation plan and budgeting for each line item.

Selecting a trusted financing partner will also be key. You can be confident you are working with a quality lender if they have a track history of funding real estate projects, and can provide you with additional resources to assist you with your investment. Be sure to compare all your options so you can select the financing program that best fits your project’s needs.

RCN Capital

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 fix and flip project, RCN Capital has competitive loan options available.