Fixing up a property and then selling it for a profit is a great strategy for new real estate investors as well as seasoned institutional investors too.
The premise is simple, find a distressed property that could use some work and purchase it at a discount. Then put some money into home improvements and renovations, and sell it for a profit!
While the process sounds simple, straightforward, and easy, there can be some significant obstacles that could get in the way of you making a profit. Many of these obstacles include having to do with financing.
Read on to find out how to finance your fix n flip project and to put yourself in the best position to make a good profit while doing it.
What is a Fix n Flip?
Another name for a fix n flip project is known as a simple house flip. The reason that “flip” is included in this is that you will generally take a property that is damaged, incomplete, or significantly distressed, and then you will “flip it” into a renovated home with complete furnishings and high-quality amenities that make it more attractive for a buyer to purchase.
The house flipping process is one that has been around for many years, but doing a fix n flip correctly does take time to master.
Financing a Fix n Flip Project
Financing your fix n flip project may not be an easy task to do if you don’t have much money starting out, as there aren’t many loan options for those without capital to get started.
There are several ways that you can go about getting the funding for your fix n flip loan. Among the top options you have are:
Hard Money Loans
Hard money loans are typically not offered by banks and private lenders since they are seen as riskier loans. Hard money lenders also don’t usually look at the creditworthiness of the borrower in order to approve a loan. These lenders will look at the value of the property that is being used as collateral instead.
Hard money loans also come with higher costs than the other types of financing that we will cover here. The reason for this is because most hard money loans are for terms of 1-3 years, but will be offset by the profit that the borrower plans to make off the sale of the home once finished.
Almost all personal loans are “unsecured”, meaning that they do not have any collateral backing them. You will be approved for this type of loan based on your credit, debt, and monthly cash flow. This differs from a traditional mortgage because personal loans are to be used for any type of personal expenses that you choose.
One type of expense that this could be used for is a house fix n flip project. However, it’s important to know the amount of risk that you take on because if your fix n flip takes longer than expected or there are unforeseen issues with the home, you could be in major hot water paying your personal loan bac with its high fees.
Home Equity Line Of Credit (HELOC)
A home equity line of credit is a revolving credit line that is based on the existing equity in your home. It is essentially a credit card that uses your home as its collateral. This makes it possible to use that source of revolving credit in order to finance the expenses that come with flipping a property.
Home equity lines of credit can be a great option for fix n flip projects because many homeowners have significant equity in their homes that they haven’t tapped into yet. By using the equity in your home, you don’t have to go to the bank or a private lender for a hard money loan or personal loan with high interest rates.
A bridge loan is a short-term loan that ranges in term anywhere from 2 weeks up to 3 years, depending on the arrangement between the lender and the borrower. Bridge loans are also known to be the “bridge” between the home buying and selling process for many.
Bridge loans can be used for those that want to buy a home before they sell. Since you would not have the profit from the sale of your home, you would need a bridge loan in order to finance the purchase of the new home until the sale of your old home occurs.
Once the sale of your old home comes through, those profits will be used to pay off the bridge loan that you’ve taken out.
In the context of a fix n flip project, bridge loans can be beneficial for house flipping because it’s a short-term loan that can be used to finance the renovations. Again, the trouble is that if the renovations take too long or the project fails completely, you’re left having to pay a short-term loan with higher interest rates.
There are many advantages that come with crowdfunding for financing your fix n flip project. First, you aren’t using your own money for a crowdfunding campaign. You are getting small investments from many investors which mitigates your risk.
However, downsides to crowdfunding include the fact that you have to market your project yourself and that you wouldn’t get as much of a profit since you would owe your investors their share after the project is complete.
The Bottom Line
Financing your fix n flip project doesn’t have to be a long-drawn-out process. Using one of the options that we discussed here will put you on the right path to making your real estate investing dreams a reality.
Be sure to always do your research and partner with experienced house flipping experts to increase your chances of being a successful real estate investor for years to come.