How Do Fix and Flip Loans Work?

Fix and flip loans are short term real-estate loans created to help investors rapidly renovate properties so they may be sold at a profit. The timeline for these loans is much shorter than traditional loans: A standard home loan is 15 or 30 years while a fix and flip loan is 6 to 18 months. The latter is also considered a much riskier investment, and commands higher interest rates as a result. A traditional mortgage rate is currently 2-4%; a fix and flip loan requires 8-16%. The borrower will use the loan money to purchase and/or renovate the property in question. They may also develop a new property on dilapidated land or demolish an old residence to make way for a new construction. Regardless of the project, the borrower’s goal is to use the proceeds from the subsequent sale to pay back the original loan and pocket the profit. Managed correctly, the fix and flip loan can allow an investor to turn a considerable profit without leveraging their own assets.

How Do Fix and Flip Loans Work?

Fix and flip loans are considered one example of “hard money”, one of several types of short-term loan backed by real property. A Bridge Loan is another type of hard money loan. Hard money loans typically have terms for no longer than a year, see relatively high interest rates, and are always secured against an asset. In the case of fix and flip loans, the property being renovated is offered as collateral. The lender will appraise the property beforehand to make sure they have some type of insurance against default, and to ensure it’s worth what the borrower is asking for it. In these types of loans, creditworthiness is less of a factor due to the loan’s short-term nature. The lender isn’t concerned with their debtor’s ability to make payments year over year, they just want to be assured the property being borrowed against has value and can be sold for a profit in a reasonable timeframe.

The amount a borrower receives for a fix and flip loan will depend on the value of the property after repairs. You can typically borrow around 70% of a property’s after repair value (ARV). RCN Capital offers up to 75% of the property’s ARV. For example, a home may be on the market for $100,000, but the ARV is expected to be $180,000. In this scenario, the fix and flip investor can borrow up to $135,000. After purchasing the home, they’ll have up to $35,000 for expenses and rehab. If they can cover remaining costs using loan proceeds, they can turn a profit without having to pay any money out of pocket.

Like other hard money loans, fix and flip loans are provided by private companies and individuals. As such, the terms and conditions for these loans vary much more than conventional, long-term financing. It’s strongly recommended the borrower vet their lender before putting pen to paper. The new real estate investor can ask their colleagues to vouch for firms, and it’s worth looking into a private lender’s track record with similar investments to see if it’ll be a good fit. In general, private lenders are not beholden to the same federal requirements banks must adhere to. The benefit here is a borrower in good financial standing has more flexibility and can negotiate more favorable terms.

From the lender’s perspective, they’ll be interested in credit history and estimated costs of purchase and renovation. A solid business plan and exit strategy will greatly increase your odds of approval. At RCN Capital, we look at an investor’s experience level to determine interest rates on fix and flip loans. Investors with solid experience can secure lower interest rates, and highly experienced investors can secure even lower rates.

Fix and flip loans are a great way to secure financing when the timeline or investor goals don’t allow for a traditional home loan. If you’re interested in fix and flip financing from RCN, feel free to contact us today to start a conversation. You may explore criteria and start the application process here.