When you’re considering a fix and flip investment, success can often be dependent on acquiring financing that is structured to meet your project’s specific needs and goals.
In order to maximize profit, the majority of flippers turn to hard money fix and flip loans. Here’s why.
Why Get a Fix and Flip Loan?
Fix and flip investing can be highly lucrative for anyone who’s able to bring the right mix of patience, careful planning, and skillful execution. The biggest hurdle to getting started, though, is finding the right financing.
Most of the time, a traditional mortgage isn’t an option for fix and flip investors, as the economics of flipping don’t satisfy the requirements set by traditional lenders (like banks). Plus, even if flippers were able to acquire a mortgage for their project, these loans are often only enough to satisfy the initial purchase of the property, and don’t provide any financial assistance with the rehab / renovation portion of a fix and flip. Traditional loans also have a much longer lead time to close, require higher upfront capital investment by the borrower, and require regular payments during the life of the loan.
Fix and flip loans, however, are specifically designed for projects that involve the purchase of an undervalued or distressed property. Their value is based on the after repair value (ARV) of the property, as well as the projected cost of renovations. Also, because of the higher degree of risk associated with fix and flip projects, the interest rates are typically a bit higher than traditional mortgages.
When it comes to flipping, time is money - the faster you’re able to complete your renovations and sell your property, the sooner you can get started on your next flip, and the more projects you’ll be able to complete on an annual basis. For this reason, fix and flip loans have a correspondingly short duration - they can be acquired in just weeks (or even days), meaning as soon as you’ve identified your property, you can get to work on the “fix” portion of your project without delay. This is in stark contrast to mortgages, which usually take at least a month (if not longer) to close - this can be a problem if other buyers are interested in the property, as a seller is incentivized to work with whomever can acquire funding and close the deal fastest.
When comparing mortgages and fix and flip loans, there’s also an important difference in the source of financing. With a traditional mortgage, you’ll be working with a bank - they have far stricter lending requirements, move more slowly, and don’t have as much experience lending to flippers. Hard money lenders, on the other hand, are specially equipped to work with flippers - they’re fast, they often have experience in real estate investing and/or development, and they’re much more flexible with the types of properties they’ll finance.
The Bottom Line
Fix and flip loans are the most sensible option for investors interested in flipping homes for profit - compared to traditional mortgages, fix and flip loans have a shorter turnaround time, they’re easier to acquire, and they’re designed for the intense and fast-paced nature of fix and flip investing.
If you’re like to learn a little more about the economics behind fix and flip investing, check out our free ebook, Essential Math for the Fix and Flipper.