The practice of flipping houses for profit is one that a lot of people use to make a significant amount of money. That said, buying a house is a difficult thing to do if you’re not flush with a lot of cash.
We’re going to take a look at one of the best ways to finance your fix & flip project today. Fix-and-flip loans tend to be the best option for people who want to buy and sell their project homes in a short amount of time.
Let’s take a look at what these loans are and how they operate.
What Are Fix-and-Flip Loans?
A fix & flip loan is a short-term loan that affords an individual enough money to buy a house and make the necessary repairs before selling. Most individuals who buy houses go with a traditional mortgage.
The difficulty with mortgages, though, is that they tend to extend for long periods of time. Most mortgages go for fifteen to thirty years before getting paid off.
It’s always possible to buy a home with a mortgage and sell the home outright, though. That said, the process is a lot more complicated with a traditional mortgage and banks prefer that you don’t fix & flip with those loans.
This is because banks don’t make a high return on those loans. Mortgages make banks significant amounts of money in interest over that 30-year period, but the return is insignificant over the course of a year or two.
On the other hand, fix & flip loans extend for a period of 6 months to one year. Lenders like Kiavi Bridge Loans offer a number of options for fix and flippers to work with.
Interest Rates on Fix and Flip Loans
Because the term is so short and there’s an understanding that it will last a short time, interest rates are a lot higher on fix & flips than on traditional mortgages.
A traditional mortgage rate tends to fall anywhere from three to five percent, whereas a fix & flip rate falls between eight and fifteen percent.
Note that the increase isn’t that detrimental to the buyer because the term is so short. Plus, you have a clear idea of the profit you could make before you take out the loan. Make sure to understand the amount of interest you’ll pay and weigh it against the lowest estimate of profits you could make.
We say to look at the lowest estimate because that’s the worst-case scenario. You want to make sure that you’ll make money in almost any situation with the house. In most cases, the bank will run through your plan and ensure profits anyway.
The Home as Collateral
Fix & flip loans use your property as collateral. This means that the home gets repossessed if you fail to make payments. It’s common to have property exist as collateral against loans.
That said, the value of your property might skyrocket right after you start working on it. The idea of a fix & flip is to put add significant value in a short amount of time.
Make sure that you’re able to afford the loan payments for this loan. That should go without saying, but it’s easy to shoot from the hip when the term is so short and the potential for profit is so high.
If you fail to make the payments further down the line of the loan, you might lose tens of thousands of dollars. Your loan might have been for $100,000 to buy the house and facilitate the repairs, but repairs could have pushed the value of the home to $150,000 in six months.
In that scenario, you’ve lost six months of time and effort plus the $50,000 in equity you produced. With that in mind, it’s smart to have the loan payments in order before you take the loan out at all.
Existing Equity to Increase Borrowing
Another interesting factor in fix & flip loans is that a lot of lenders will look at your existing home equity when figuring out how much to give you.
A general rule of thumb is that lenders give up to eighty-five percent of the equity on your home, minus your outstanding mortgage balance.
So, your home is worth $300,000 and you’ve still got $200,000 to pay. That means the bank could loan you up to $85,000 for a fix & flip operation. If you have other assets to leverage the loan, that might impact the amount that you get as well.
401(k) Employer-Account Loans
People with significant 401(k)s might get the option to take out a loan from those accounts. In most cases, the employer account allows individuals to take loans of up to half the amount in the account, or $50,000.
The lower amount takes precedent, and that tends to be the limit available to borrowers. That said, $50,000 is a significant amount when it comes to a fix & flip. If you verify with both lenders, you might be able to use a 401(k) loan in addition to a bank fix & flip loan.
One nice thing about this loan is that you’re essentially paying yourself back. The interest on the loan goes to the employer account, but the principal loan was yours in the first place, so it comes straight back to your account.
Most other options for 401(k) withdrawal have significant tax implications, while a loan is an option available without those penalties.
The borrowing requirements of fix & flip loans are fewer than traditional mortgages. This is because the value of the asset is more important than the long-term financial responsibility of the individual.
That opens up the opportunity for fix & flips to those who haven’t had a lot of time to build credit.
Want to Learn More About Fix and Flip Financing?
Hopefully, our look at fix-and-flip loans was insightful for you. There’s a lot more to learn, though, as there are a number of options for you to choose from. We’re here to help you understand all you need to know.
Explore our site for more ideas on getting a fix & flip loan and turning it into a significant profit.