We’ve all seen the reality TV shows for flipping houses. Someone buys a fixer-upper, completely transforms the house in no time at all, and then flips it for a hefty profit. The reality of fixing and flipping homes isn’t quite so simple. But don’t be fooled — house flipping can be a lucrative venture, although it can take more time, work, and money than what the home improvement shows disclose.
Whether you’re looking to make a little money on the side or you want to start a full-fledged business to replace your traditional 9-to-5, there’s one thing all house flippers have in common: the need for capital. Most people don’t have the funds to flip a home, but the good news is that you don’t have to have a loaded bank account to get started. There are multiple loan options available to you, whether you’re new to the game or a more experienced real estate investor.
In this post, we’re going to take a look at the best loans for flipping houses. These funds can be used to purchase investment properties and fund renovations so you can resell the home for a profit. You’ll learn how to qualify for these loans, why they’re a great idea for house flipping, and the potential drawbacks before you sign your loan paperwork.
Hard Money Loans
Contrary to what the name suggests, a hard money loan isn’t hard to get at all. In fact, it’s one of the easiest loans to secure for purchasing investment properties. However, that convenience comes at a price — something we’ll go into more detail about in a minute.
A hard money loan is private funding obtained from investors or individuals. Unlike financing with a traditional lender such as a bank, your credit score and income aren’t necessarily a requirement for qualifying. Instead, a hard money loan is secured with an asset. With a house flipping business, the property you’re fixing would serve as your collateral and could be seized if you don’t pay your loan as agreed. Funds from hard money loans can also be received quickly — in just days or weeks compared to months with other funders — which may be necessary if you have to move fast to snap up a great deal.
Hard money loans are a good option — and in some cases, the only option — for borrowers with poor credit scores, low income, or other barriers that would prevent them from qualifying for traditional loans. Because the property and its potential resale value are most important to the lender, hard money loans are best for experienced flippers that have fixed and flipped at least one property. However, if you’re a new business owner, you may still qualify, particularly if you are working with a contractor to improve the property.
While qualifying for a hard money loan is easy, there are, of course, a few drawbacks. The first is that hard money loans are short-term loans. Typical repayment terms are 1 to 5 years. As with other forms of short-term funding, hard money loans also have high interest rates when compared to more traditional types of financing, typically in the double digits. The goal, then, is to purchase the property, renovate, and sell it as quickly as possible.
Home Equity Loans & HELOCS
You can also use your own assets — your personal residence — to fund your fix-and-flip venture. How? With a home equity loan or home equity line of credit (HELOC). If you have equity in your home and meet other requirements, you may qualify. Here’s how it works.
As you pay down the mortgage on your home, you build up equity — in other words, this is the difference between the value of the home and what you owe on your mortgage. Rising property values may also contribute to equity. Let’s look at an example. If your home is appraised at $500,000 and you owe $200,000 on your mortgage, there is $300,000 in equity in your home. This equity can be used to secure a home equity loan or line of credit that can be used for any purpose, including the purchase of an investment property.
A home equity loan, which is also known as a second mortgage, provides you with a lump sum that is repaid over a long period of time. A HELOCÂ allows you to draw from a set line of credit multiple times until you enter the repayment period. A home equity loan is the better choice if you know how much money you need to purchase and fix up your property. A HELOC is the best option if you need more flexibility with your funding.
To qualify for a home equity loan or HELOC, a bank or other lender will look at the amount of equity in your home. The lender then uses a loan-to-value ratio to determine how much you can borrow. In addition to owning a home with equity, qualifying borrowers must have a low debt-to-income ratio and a solid personal credit score. You do not have to have prior house flipping experience to qualify.
Home equity loans and HELOCs have low interest rates and long repayment terms, making it more affordable for borrowers to get the funds they need. The downside, however, is that approval and funding of the loan may take a long time, so it’s not ideal for deals that will move quickly. You also put your personal home at risk if you default on payments.
Business Lines Of Credit
If you like the idea of a flexible line of credit but don’t want to put your home on the line, you could fund your business activities with a business line of credit. With a business line of credit, you’ll be approved for a set credit limit. You will be able to make multiple draws against this line of credit up to this limit. If you have a revolving line of credit, you’ll be able to continuously access funds as you pay down your balance.
If the line of credit is unsecured, you won’t have to put up specific collateral, although the lender may put a UCC blanket lien against your business assets or require you to sign a personal guarantee.
A business line of credit is great for fix and flips because of the flexibility offered. If, for example, a renovation goes over budget, you can access additional funds, provided you haven’t already hit your credit limit.
Lenders use information about your business to determine if you qualify for a line of credit, as well as your credit limit. At a minimum, lenders will evaluate your time in business and revenue for at least the last three months. Other lenders may have annual revenue, personal credit, and business credit requirements. Since you will need to show some business revenue and at least a few months of operations, this isn’t ideal for brand new businesses or businesses that haven’t yet made any money.
There are quite a few reasons why you should consider applying for a business line of credit for your fix and flip business. There are few restrictions on how most lines of credit are used, so you can put funds toward purchasing and renovating a property. Also, there are many lenders that don’t take personal or business credit history into account, so this could be a funding option for anyone with a low personal credit score or a lack of business credit.
Of course, like all other forms of funding, lines of credit have their drawbacks. In order to receive the best rates and terms, there are higher borrower qualifications that you might not meet. Lines of credit with minimal requirements may have high interest rates, shorter repayment terms, and additional fees. You might also find yourself limited by your assigned credit limit and be unable to fully fund your renovation.
Rollovers As Business Startups
If you want an alternative to traditional funding, you may be able to put your 401(k) or another retirement plan to work for you through a rollover as business startup (ROBS). Normally, early withdrawal of your retirement funds means that you’ll have to pay taxes and other penalties. However, a ROBS allows you to bypass these penalties and use your retirement funds for your business.
Here’s how it works. A new C-corporation is set up, along with a new retirement plan. Funds from your existing plan are rolled over into the new plan. Funds are now used to purchase stock in the new C-corp. Then, the proceeds from the sale of stock can be used for any business purpose, including funding your fix and flip business.
One of the biggest benefits of a ROBS plan is that you are not borrowing from a lender, so you don’t have to worry about interest rates, closing costs, and other fees. However, many people opt to have their ROBS plan set up and managed by a ROBS provider, which requires a setup fee and monthly maintenance costs. A ROBS provider can get everything set up legally, while also ensuring you maintain compliance.
With a ROB plan, you don’t have to worry about factors like income, time in business, personal credit history, and a business credit profile. You do, however, have to worry about one major drawback: potentially losing your retirement funds if your fix and flip business fails.
If you’re just starting your business, you’ll find that qualifying for business loans is challenging — if not impossible — for new businesses. This is because newly launched businesses are unable to meet requirements such as a business credit profile and annual revenues. If you don’t qualify for a business loan, why not use your personal information to qualify for a personal loan for business?
A personal loan is a loan that is taken out in your name, not the name of your business. With a personal loan, your business experience (or lack thereof) isn’t a factor for approval. You’ll use your income and your personal credit profile to qualify. Once approved, you’ll receive a lump sum that can be used for business expenses. There are multiple avenues you can take to receive a personal loan for business, from your bank or credit union to online lenders.
Personal loans can have very favorable rates and terms, resulting in a lower overall cost of borrowing. However, the best rates are reserved for borrowers with low debt-to-income ratios and a solid credit history. If you have personal credit challenges, you may qualify with some alternative lenders. However, you may have higher interest rates and shorter repayment terms, or be required to put up collateral to secure the loan.
If you’re more experienced in flipping houses, you may qualify for a traditional loan or mortgage from a bank, credit union, or other financial institution. These work just like the mortgage of your primary home: the lender gives you money, you make the purchase, and then you repay the loan over a longer amount of time — typically 15 to 30 years.
The good news with these loans is that interest rates are very low. However, qualifying can be difficult. To qualify for a mortgage, you’ll have to show previous experience in flipping houses, meet credit guidelines, and fulfill other requirements. Not all lenders will offer loans or mortgages for properties that aren’t occupied by the owner. Others won’t lend on homes that are in extreme disrepair. Because of its long repayment terms, going the traditional route is often a good idea if you plan to fix up a property and rent it out (or “buy and hold” as it is known in the industry) instead of immediately selling once renovations are complete.
How To Improve Your Chances Of Being Approved For A Fix & Flip Loan
While there’s never a guarantee that you’ll get approved for a loan for your fix and flip business, there are a few steps you can take to improve your odds. The lending process can also be lengthy, especially if you don’t understand the application process. Know what to expect and be prepared by taking the following steps.
Have A Business Plan
Lenders want to work with low-risk businesses that have a greater chance of success. After all, if a business fails, it is more likely to default on the loan. You want to show your lender that you are serious about your house flipping business and that each property is worth the investment. Your business plan should include information about your business such as your industry experience, your objectives, and a financial summary. Learn more about writing your business plan.
Each time you plan to rehab a property, an analysis of that property should be included in your business plan. We’ll discuss what you should include in this analysis in just a minute. Taking the time to analyze each property also is critical for getting the right amount of money from your lender.
Have A Property In Mind & A Plan Of Action
In order to be able to analyze a property and present this information to a lender in your business plan, you must first have a property in mind. Once you’ve found a property, you need to create a plan of action, from what contractors you’re going to use to how much the property will be worth once it’s rehabbed. This not only gives you a better understanding of the costs and timeline of your renovation, but this plan of action should also be included in your business plan.
What should your plan include? At a minimum, address the following points:
- Sale prices of comparable homes
- Neighborhood analysis
- Financial projections for the renovation
- Timeline from acquisition to flipping the property
- Information about who will be involved in the rehab, such as business partners and contractors
- Appraisal of the property in its current state
- Estimated value of the property post-renovations
If you’re new to fixing and flipping homes, it’s wise to work with someone that is familiar with the industry. This could mean taking on an experienced business partner, working with contractors that specialize in renovations, or talking to real estate investors. These individuals can share their expertise, which can help you have a better understanding of the business and create an effective and realistic plan of action.
Understand The Costs Of Flipping The House
When it comes to flipping houses, one area that commonly trips up newbies is estimating the costs associated with acquiring and renovating a home. It is very easy to underestimate the costs of fixing and flipping a home. If this occurs, you risk not borrowing enough money from your lender, which could significantly delay your project.
Experienced flippers know that creating a detailed scope of work is imperative to fully understand the costs associated with flipping a property. You can work with a contractor and an appraiser to get a more accurate picture of costs. Some costs to consider include but are not limited to:
- Down payment
- Purchase price of the property
- Closing costs
- Building materials
- Labor: Electricians, plumbers, landscapers, painters & general contractors
The cost of your renovation will vary widely based on the amount of work that needs to be done. For example, a home that only needs a few cosmetic fixes (upgraded countertops, paint, or new flooring) may have very few associated costs to get it ready for the next buyer. On the other hand, a home that needs structural work, a new roof or HVAC unit, or an additional room may have significantly higher costs.
In addition to the cost of buying and renovating the property, you have to consider other expenses such as property taxes, property insurance, real estate agent fees, and marketing costs to sell the property.
Even with careful planning, you should always expect the unexpected. Unforeseen issues can arise during the renovation process that can increase your costs and add to your timeline. But the more details you include in your scope of work, the more accurate your calculations will be.
Improve Your Credit
Most people don’t have the perfect credit score, so there’s always room for improvement. Cleaning up your credit and taking steps to boost your score not only increases your chance for approval, but also opens up more funding options and helps you qualify for the best rates and terms.
While there is no overnight fix for raising your credit score, there are some steps you can take that can raise your score by several points or more over a few weeks or months. This includes accessing your free credit score, disputing any errors on your report, paying down (or paying off) debts, and keep your balances low. Always make your minimum payments on time (and pay more, if you can) to lower debt and help increase your score. Learn more about how you can raise your credit score before applying for a loan.
Think outside the box
Sometimes, even the most carefully laid plans fall through. For example, maybe the funding you had in place suddenly fell through and now you’re back to square one. It happens to even the most experienced entrepreneurs. The key is to not let it slow you down and to think outside of the box. If you’re having trouble securing funding through traditional lenders or face high interest rates and less-than-stellar terms, consider other financing options. This could include using a real estate crowdfunding platform, taking on a business partner with capital to invest, or tapping a friend or family member for a loan.
Fix & Flip Business Loan FAQs
What type of expenses will fix and flip loans cover?Â
You can get a loan to cover nearly any expense for your fix and flip business. Funding methods like ROBS and home equity loans have few — if any — restrictions on how they are used. Funds from your loan can typically be used to cover a down payment, pay fees and insurance, purchase the property, and fund rehab costs. However, it’s always important to check with all potential lenders to find out about any restrictions on how funds are used.
What is the best fix and flip loan for a beginner?
If you’re a beginner, there are a few funding options to consider for your first fix-and-flip property. Using your own money through a ROBS is one option that has several benefits, such as no credit check or high interest rates. If you have a good credit score and equity in your property, you might also consider a home equity loan or line of credit. All of these options do not have time in business, business credit score, or annual revenue requirements.
Hard money loans may also be an option, but due to higher interest rate, you should explore other alternatives first. While many hard money lenders require you to have some experience fixing and flipping properties, you may still qualify provided you have a solid business plan and connections with experienced contractors or business partners.
Can I get a fix and flip loan without putting money down?
When you apply for a fix and flip loan, lenders typically look at two numbers: the loan-to-value ratio (LTV) and the after-repair value (ARV). The LTV is the size of the loan compared to the value of the property. Most lenders cap their maximum LTVS at 90%, while others may have higher or lower requirements. For example, if you’re purchasing a property that costs $200,000 and will borrow from a lender with a maximum LTV of 90%, the lender will fund $180,000. You will be required to pay $20,000 as the down payment of the home.
Other lenders calculate how much you can borrow based on the ARV of the property. This is the estimated value of the property after it has been renovated. Using the same example as above, let’s assume that the ARV of the property is $300,000. In this example, let’s say the lender will loan a maximum of 80% of the ARV. This means that you can borrow up to $240,000.
With many loans, you may be required to make a down payment. However, some hard money and private lenders may fully fund your real estate deal with no money down. You may also consider other more advanced methods of flipping properties, such as wholesaling — putting a property under contract and then selling that contract to another buyer. Before you dive into these different loans and methods, consider speaking with an experienced real estate investor and fully researching your options.
Can I get a fix and flip loan without a credit check?
It is possible to get a fix and flip loan without a credit check by working with a hard money lender — an individual or investment group that bases its loan approvals on the value of the property and not your credit score. The good news is that personal credit isn’t a factor for approval, so if you have bad credit or a lack of credit history, you may be approved based on the property you’re interested in renovating. On the flip side, though, hard money loans are notorious for high interest rates. These are short-term loans, which means that you’ll have to purchase, renovate, and sell the property quickly.
You may also qualify for a business line of credit if you have an established business. Some lenders will look at performance metrics such as your time in business and annual revenues to determine if you qualify. As with hard money loans, you may face higher interest rates, additional fees, and shorter repayment terms if you go this route.
If you have a retirement account, you can set up a ROBS to use your own funds for your real estate purchase. The only requirement is to have a qualifying retirement account with a minimum amount of funds — no credit check required.
Operating a fix and flip business certainly isn’t like what you see on “reality” TV. The reality is that it takes time, hard work, and capital to flip houses. However, when it’s done right — and you find the right funding for your situation — flipping houses can be a very lucrative and rewarding venture. As with any type of loan, make sure you do your research, understand the challenges ahead of you, and make the best decision based on your business goals. Good luck!
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