What Are Fix and Flip Loans? 2022 Guide for New Investors

Real estate investments are popular these days, especially fixing and flipping homes. In the first quarter of 2021, enterprising individuals and companies flipped 32,526 single-family homes and condos in the U.S. 

One question potential flippers ask is about types of financing for this form of investment. Specifically, what are fix and flip loans? Let’s take a look at the ins and outs of these loans and how you can use them to fix and flip investment property.

Table of Contents:


Property Flipping Definition

House flipping is the process of buying a home that needs repair or renovation, fixing it up, and then selling it for a profit. Flipping can be a good money-maker for those who are savvy about real estate, construction, and project management, but it is far from a given that it will result in a windfall – or any profit at all – especially for those just starting out. 

Types of Loans for Flipping Houses

Buyers looking to flip homes can purchase a fixer-upper using cash or seek a loan to finance the sale. Borrowers will need a strong credit score to be considered for loans, especially for risky endeavors like flipping.

There are a variety of types of loans flippers might seek to finance the investsment purchase.

  • Hard Money Fix and Flip Loans: Hard money fix and flip loans are based on the after-repaired value (ARV) of the home and have more stringent terms than conventional loans, usually including a term of a year or less and high-interest rates, along with two to five points. Hard money borrowers may not have to pay the points until the house sells after the flip, instead of at closing.
  • Fix and Flip Line of Credit: A fix and flip line of credit provides approval to borrow a predetermined amount of money that you can then draw down as needed to purchase and rehab properties.
  • Commercial Fix and Flip Loans: Commercial loans are designed for rehabbing and resale of commercial properties, provide a large loan size, often up to several million, and can be used to fix and flip multiple properties at once.
  • Bridge Loans: A bridge loan is a short-term loan that can be applied to fix and flip, usually supplied by private lenders, hard money lenders, and other specialty finance companies.
  • Private Money Lending: Private real estate investors may be interested in providing loans for fix and flip projects. If you’re an investor in need of a fix and fix loan, apply now, and let’s talk about your deal.
  • Crowdfunding: Seeking funding from a large number of private lenders via a crowdfunding process is an alternative to working with a single private lender. 

How To Get a Loan to Flip a House

Getting a loan to flip a house is simple. Do your research, set a budget, get pre-approved, purchase, and renovate. Soon you’ll make returns and potentially see a sizable profit. 

Step 1. Do Your Research 

Study the real estate market in the area where you want to buy. Pay attention to the difference between the current value of properties you might buy and homes that will serve as comps to the home once it’s renovated.  

Tip: Get familiar with real estate prices, zoning regulations, amenities, and other aspects of a particular neighborhood, as local knowledge will increase your chances of success.

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Step 2. Set a Budget for Renovation

An estimate of how much it will cost to rehab the home is a key piece of information you’ll need as you calculate the details of your project. First-time flippers are likely to fall into the trap of under-budgeting for renovation, which can reduce potential profits.   

Tip: Build good relationships with suppliers and contractors so you can get accurate price estimates and on-budget execution.

Step 3. Get Pre-approved for a Loan

Pre-approval is key so you can close quickly once you find the right property to flip. You’ll be provided with an interest rate in this step, which will help you ensure your deal is staying on-budget. Approach a lender like Revolution Realty Capital to get pre-approved before you start looking at houses.

Tip: Get pre-approved as early as possible – it’s easy, free, and will give you information about how much you can afford to spend.

Step 4. Purchase and Renovate

Once you’re pre-approved by your chosen lender, you’re free to purchase and flip the house. If you’re wondering how to flip houses with no cash reserves, a private money loan is the answer: You may not have to pay anything out-of-pocket throughout the process.

Tip: Keep looking at alternate lenders’ offerings as you go so you’ll know the best option for your next project.

Pros and Cons of Flipping Houses

Flipping houses may seem like an assured and exciting way of making money, but the reality is not so simple. There are both pros and cons to flipping property. Here are a few of each:

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Fix and Flip Pro

Quick profit potential

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Fix and Flip Con

High financial risk

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Fix and Flip Pro

Develop buyer insights

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Fix and Flip Con

High holding costs

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Fix and Flip Pro

Potential to scale

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Fix and Flip Con

Requires time and effort

House Flipping ROI

To calculate your return on investment (ROI) for a flip, divide the amount of net profit you make on the project by the amount you’ve put into the investment property. Include all elements including loan carrying costs and closing costs, taxes, and renovation costs. 

ROI = net profit on resale ÷ amount invested in the property 

Fix and Flip Loans Frequently Asked Questions

Those looking at how to get a loan to flip a house often ask the same types of questions. Here are a few you might be wondering about.

How Does Fix and Flip Financing Work?

Fix and flip loans provide a loan amount that covers the purchase price and the cost of renovation for an investment property. 

Is Fix and Flip Easy?

Fix and flip is much more difficult than popular depictions make it seem. Beginners are apt to make mistakes, and even pros take on substantial financial risk in the process.

Do Banks Fund Fix and Flips?

Banks do not tend to provide loan programs geared toward fix and flip financing. Conventional mortgages or business loans may be applied as well, but aren’t the best options.

Can You Flip a House With a Conventional Loan?

Purchasing a house with a conventional mortgage is an option for those not interested in private money loans, but you need cash reserves or other assets to serve as collateral for such a loan. 

Can I Deduct My Own Labor When Flipping a House?

No. Personal labor cannot be applied to the cost basis of a house you are flipping.

Fix and Flip Loans Are a Flippers Best Friend

Those interested in flipping a house will be wise to look closely at fix and flip loans to finance their project. Now you know what fix and flip loans are, you’ll be ready to assess whether this option is right for you. 

At Revolution Realty Capital, we specialize in helping real estate investors get the right financing for long-term success. 

 

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Daniel William

Co-Foundet Acme Corp

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