Fix and Flip Loan Terms: Breaking Down the Basic Terms

Many real estate investors have ventured into the world of property flipping, and more are considering to do so every day. But one major challenge many face is securing the necessary funding for their projects. Fortunately, there are options available, like fix and flip loans. In this article, we’ll dissect the typical terms, costs, and rates associated with these loans.

Understanding the Basics of Fix and Flip Loans

Fix and flip loans are financial tools crafted to support real estate investors aiming to renovate and resell properties for a profit. Unlike the well-known traditional mortgages, these loans are engineered for short-term usage and offer financing for both acquiring and fixing up the property. Interestingly, they aren't limited to a single source. You can secure these loans from a variety of lenders, be it hard money lenders, private investors, or even your familiar traditional banks.

Typical Terms of Fix and Flip Loans

When it comes to fix and flip loans, the terms are like a different language compared to your traditional home loans. Think short and sweet - the terms for these loans usually span about a year, but you might see some as brief as half a year or stretching to 18 months. The whole idea is to provide you the financial backing to move swiftly through your renovation project. One thing to note, these loans are typically interest-only. That means each month, you're only chipping away at the interest, leaving the principal balance for the finale when the term wraps up. Also consider a pre-payment penalty - almost all good fix and flip loans have no such penalty so that you can exit the property easily when the rehab is done. The best fix and flip loan for everybody is a paid off one!

The Costs Associated with Fix and Flip Loans

The most important consideration for the property flipper may be the size of the down payment. While purchase and rehab loans are inherently risky, the down payment can actually be pretty small because the after-repair value of the property will lesson the risk of the down payment on the initial value (i.e. the value and owner's equity will go up together as the rehab is done).

Expect this down payment to be somewhere between 10% to 30% of the property's purchase price depending on a combination of previous flip experience and credit score.

(Note: please be aware that Fix and Flip Financing has a rare program with 0% down and available in certain metro areas in 10 states (get more info).

Another major cost to anticipate is the origination fee, a lender's charge for processing your loan. This usually hovers between 2% to 5% of the loan amount. Another pocket-digging aspect is the closing costs, covering a range of expenses like appraisals and legal fees.

Rates on Fix and Flip Loans

Strap in as we dissect the interest rates associated with fix and flip loans. Unlike conventional loans, these unique loans come with a higher price tag. They dance between 10% and 15%, with the exact figure depending on a few factors. These can include your creditworthiness, how many properties you've flipped in the past, and the specifics of the property in question and the renovation project at hand. So, it's not a one-size-fits-all scenario. Each project is evaluated independently to determine the risk involved and the potential profitability, which ultimately influences the interest rate. So, make sure to have all your ducks in a row and present a compelling case to your potential lender!

Navigating Through the Application Process

Embarking on the application journey for a fix and flip loan? Brace yourself for an experience that's more streamlined and faster than your usual mortgage application. Key elements your lender will be examining include the profitability potential of your project, the post-renovation worth of the property (commonly known as the After Repair Value or ARV), and your track record in flipping properties. A well-prepared proposal outlining a feasible budget and timeline can tip the scales in your favor significantly. Be prepared for a rapid speed to close well under a month - as little as 5 days more like 10-15 days in most cases.

The Exit Strategy on a Fix and Flip is Key

It's important to make sure you exit the fix and flip loan within the short-term period of the loan (normally one year). That means keeping the project on time and under budget. Most rehab loans are actually in 3-6 month duration as the borrower wants to move fast to complete the project and recoup the benefits sooner (and to reduce interest expense on the short-term loan). The main exit strategies are to sell the finished property or to refinance it to a long-term loan at a lower interest rate (DSCR investment type, for example). Then you need to put it on the market and find a rental tenant. If selling, be well aware of the tax implications on profits made from flip sales.

Risks and Rewards of Fix and Flip Loans

Venturing into the world of property flipping via fix and flip loans offers a chance of lucrative returns. However, it's essential to bear in mind that the landscape isn't always smooth sailing. The property market's unpredictability can play tricks, causing your revamped property to linger on the market longer than you anticipated, testing your patience and budget. High rewards can be sweet, but high risks are the other side of the coin. It's like a daring game of poker where a well-calculated strategy can lead to big winnings, but an unexpected card can alter the game entirely. So, before you leap into the fray, ensure you have a robust strategy, sufficient backup funds, and preferably, some seasoned experience under your belt. The world of fix and flip loans isn't for the faint-hearted, but with the right moves, it could be a winning game.