A fix and flip, where you purchase a distressed property for a low price, renovate it, and try to sell it at a profit, can be a very lucrative business investment. However, getting money for the purchase and renovation of a property can be challenging, and you may need fix and flip funding from a lender to facilitate your investment.
Below are four common types of loans that you should consider when thinking of how to get fix and flip funding:
Home Equity Line of Credit or Home Equity Loan
A home equity loan, also known as a home equity line of credit (HELOC), lets you tap into the equity built into your primary residence to finance your fix and flip project.
A HELOC works like a credit card, giving you access to a revolving line of credit that you can tap into when necessary and later pay down the balance on. Interest accrues only on the owed balance. On the other hand, a home equity loan works like an installment loan, giving you cash upfront to pay back the loan in fixed monthly installments.
Although the low rates of these credit lines can make your house flip more profitable, you should keep in mind that there is a significant risk that your home could be foreclosed on if you default on your payments.
Hard Money Loan
A hard money loan is a short-term facility issued by a private lender and uses the property you plan to purchase as collateral. It is a popular choice for flips since it does not require perfect credit or a high income. What’s more, the approval process is relatively quick, compared to traditional lenders like large banks that make borrowers submit piles of paperwork and go through several levels of approvals.
A hard money lender simply looks at the property’s equity potential to establish if it can be a profitable investment, instead of studying your credit score or earnings.
A personal loan is a fairly straightforward credit facility and has the flexibility you need for home renovations, making it ideal for partial funding for your fix and flip project.
If you have a low debt-to-income ratio and good credit, you could qualify for a personal loan to fund your investment. According to the Federal Reserve, the average interest rate charged on a 24-month personal loan is 9.39%, making it relatively expensive. What’s more, this rate may rise significantly if you have poor credit.
Also known as crowdfunding, peer-to-peer lending is a relatively new financing method where investors can pool money to fund your investment. Through various online platforms, you can link up with real estate crowdfunders so you can pitch your project to them as a viable investment.
The major drawback to using crowdfunding to fund your flip is that, due to the influence of rising inflation, you may have to pay significantly high interest, sometimes up to 14%. You may also need to pay the crowdfunding platform an origination fee.
The Bottom Line
Although flipping is a potentially lucrative real estate investment, it carries risk and requires a significant amount of capital. As a result, you need to carry out a substantial amount of research into different lending models to ensure you get the best rates and most flexible loan product.
Looking for Funding for Your Next Fix and Flip Project?
RCN Capital offers short-term and long-term financing options for real estate investors, commercial contractors, developers & small business owners across the nation. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next fix & flip investment.