Fix and flip loans provide the necessary capital to cover both the acquisition and renovation costs, making them ideal for investors looking to execute rapid turnaround projects.
Unlike traditional mortgages, fix and flip loans are structured for flexibility and speed. Meaning that they’re offering quick approvals and tailored repayment terms to align with the fast-paced nature of flipping properties.
But before we uncover how these loans work, we need to introduce you to what fix and flip loans are.
What are Fix and Flip Loans?
Fix and flip loans are a type of short-term financing tailored for real estate investors aiming to purchase and renovate properties for quick resale.
These loans are designed to provide investors with the necessary funds to acquire distressed or undervalued properties, finance renovations, and improvements, and cover the associated costs of listing and selling the property.
Typically, fix and flip loans come with higher interest rates, often between 8% and 12%. While they can be risky, these loans offer a lucrative opportunity for skilled investors to generate returns within a short period.
Types of Fix and Flip Loans
Having a well-crafted plan and selecting the right lender are important when making the fix and flip strategy. Holding costs, which can encompass taxes, utilities, and insurance, significantly impact the profitability of a project.
Therefore, choosing the appropriate loan type is essential.
1. Hard Money Loans – For Borrowers Who Prefer a Quick Option or Who Can’t Secure Another Form of Financing
Hard money loans are short-term, high-interest loans provided by private investors or companies rather than traditional financial institutions.
They are designed specifically for real estate investors and can close within days, much faster than conventional loans. Although these loans do not require extensive credit checks, they come with higher interest rates.
2. Home Equity Loans and HELOCs – Best for Homeowners Who Have More Than 15% Equity in Their Primary Residence
Home equity loans and home equity lines of credit (HELOCs) use the equity in your existing property as collateral.
- Home Equity Loan: Provides a lump sum of money with a fixed interest rate, repayable over a fixed period.
- HELOC: Functions like a credit card, offering a revolving line of credit that you can draw from as needed during the draw period. HELOCs often have lower interest rates than hard money or personal loans and can finance multiple flips depending on your credit limit.
To qualify, you generally need at least 15% equity in your home. Home equity loans have terms ranging from five to 20 years, while HELOCs typically have a 10-year draw period followed by a 20-year repayment period.
3. 401(k) Loans – Best for House Flippers With Established Retirement Savings or Who Can’t Secure Another Form of Financing
401(k) loans allow you to borrow against your retirement savings. These loans often have lower interest rates and a simpler approval process, as you’re borrowing from yourself.
However, they must be repaid within five years, and failure to repay could lead to penalties and taxes.
4. Personal Loans – Best for House Flippers with Good Credit who Need Relatively Small Amounts of Funding
Personal loans are unsecured loans available from traditional financial institutions and online lenders. They usually have interest rates ranging from 4% to 36% and terms of two to seven years.
Secured personal loans, which are collateralized by the property, may offer lower rates but require longer processing times.
5. Seller Financing – Best for Flippers Who can Find a Seller Willing to Work With Them and Don’t Have Other Financing Options
Seller financing occurs when the property seller finances your purchase instead of requiring you to secure a loan from a traditional lender. Payments are made directly to the seller, and the terms are usually less rigorous, allowing for quicker transactions.
Be sure to draft a formal agreement to avoid any misunderstandings.
6. Business Line of Credit – Best for Experienced Flippers Looking for Flexible Financing
You can get flexible financing with a business line of credit, which lets you take out as much money as you need up to a pre-set credit limit. Interest is charged only on the amount borrowed, making it a convenient option for managing fluctuating renovation costs.
Typically available to established real estate investors with strong credit and business financials, this option is suitable for those who need working capital over an extended period.
How Do Fix and Flip Loans Work?
You’ll need a good credit score, a solid business plan, and a property that can be improved and sold at a higher price to qualify for this loan. The amount you can borrow typically depends on the property’s after-repair value (ARV).
These loans are generally structured as either a term loan or a line of credit, depending on your lender and financing needs. The loan is usually secured by the property you’re purchasing and renovating, and there’s often no penalty for paying off the loan early.
Fix and flip loans are meant to be paid off within 12 to 18 months, which translates to higher monthly payments. Therefore, it’s essential to have sufficient cash flow to cover these payments.
Some fix and flip loans offer interest-only payments before the full loan balance is due, making it easier to manage costs while renovating the property. Once renovations are complete, the property can be sold to pay off the loan balance.
Lenders use several metrics to determine the amount of funding you’re eligible to receive. These include the loan-to-value (LTV) ratio, the loan-to-cost (LTC) ratio, and the ARV.
| Term | Description | Example |
| Loan-to-Value (LTV) Ratio | Compares the loan amount to the property’s current value. | For a $100,000 property with a 75% LTV, the lender provides $75,000, and the borrower covers the remaining $25,000 as a down payment. |
| Loan-to-Cost (LTC) Ratio | Compares the loan amount to the total cost of the project, including purchase, renovation, and other expenses. | If the total project cost is $120,000 and the lender offers 80% LTC, the borrower would receive $96,000 in loan funds, needing to cover the remaining $24,000. |
| After-Repair Value (ARV) | An estimate of the property’s value after the renovations are complete. | If the expected post-renovation value is $200,000 and the lender offers 70% ARV, the maximum loan amount would be $140,000. |
Fix and flip loans are best suited for experienced real estate investors who are adept at identifying target properties, accurately estimating renovation costs, and selling the updated properties quickly.
How to Secure a Fix and Flip Loan?
Obtaining a fix and flip loan can be a big step in your real estate investment journey.
Here’s what you need to do to secure a fix and flip loan:
1. Understand Your Finances
Before seeking a loan, gather all pertinent details about your fix and flip project. Create a detailed scope of work, timeline, and budget estimate. This will not only help you understand the total cost but also determine the amount of capital you need.
Include a market analysis and detailed financial projections to strengthen your loan application.
2. Evaluate Your Qualifications
With an estimate of your financing needs in hand, assess your qualifications. Review your time in business, annual revenue, and personal credit score.
Beginners may need to rely more on personal credit and financial history, while experienced flippers can leverage their track record and business finances to secure better loan terms.
3. Research Loan Options
Research various loan types to find the one that best fits your needs. For beginners, we’d recommend personal loans.
They often have fixed interest rates and repayment terms, making them a good option for those new to flipping houses.
4. Find and Compare Lenders
Identify lenders that offer fix-and-flip loans, paying attention to those specializing in this niche. Traditional banks may shy away from these high-risk investments, but private investors and specialized lenders can offer competitive terms.
One such option to consider is Lukrom. Our executive team has experience in ground-up development, office, retail, industrial, multifamily, and single-family residential real estate.
We focus on private lending and offer financial solutions tailored to real estate investors. Additionally, we provide private investment opportunities for accredited investors, making us a great choice for flexible and investor-friendly financing for fix-and-flip projects.
5. Apply for the Loan
Submit your application with all necessary requirements, including your business plan, estimated budget, timeline, and financial projections.
If you’re new to flipping, be ready to provide comprehensive personal and business financials. Experienced investors might receive quicker approvals.
6. Close on Your Loan
After approval, finalize your loan paperwork and begin your project. Stay in contact with your lender for guidance and support.
Manage your loan responsibly by keeping up with payments to avoid foreclosure and ensure your project’s success.
