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The Guide to Flip and Fix Loans for Beginners

By Sharad Mehta
10th Jul, 2023

The Guide to Flip and Fix Loans for Beginners

Real estate investment is a field that’s absolutely ripe with opportunity, whether you’re just getting your start or a veteran of the game. Flipping houses has become a popular avenue, especially among newcomers, even becoming a cultural touchstone on television. With more and more people needing housing every day, the earning potential of house flipping has arrived on the radar of investors the world over. However, it doesn’t come cheap, which is where fix and flip loans come in.

Fix and flip loans are a way into the house-flipping game for people with less financial freedom, offering beginners the monetary freedom to purchase, renovate, and ultimately sell properties for a profit. They’re a steady way for new starters to crack into the industry, often catering to those with poor credit or patchy financial histories.

One can’t understate the potential of fix and flip loans for beginners with bad credit, so we’ve put together this blog to expand on them as a concept while also shining some light on the process of securing a loan.

What are Fix and Flip Loans?

Fix and flip loans are short-term cash injections, specifically provided to offer support to house flippers throughout the renovation process. They can consist of the necessary funding to purchase the property, carry out the renovations themselves, and bolster the selling process. They’re named as such as they allow investors to “fix” up houses, then “flip” them for a profit.

Fix and flip funding differs from traditional mortgaging, as these loans are primarily based on high, fast-growing interest rates. Banks and financial institutions understand that a fix and flip process is a high-risk activity to participate in, which is why the full loan process generally only lasts between 6 to 18 months.

When figuring out how to start flipping houses with no money, fix and flip loans are particularly attractive. Their flexible eligibility criteria differ from that of traditional lenders, assessing the loan based on the potential profitability of the investment property, rather than focusing on personal finances such as credit scores. This opens up the door to beginners with bad credit, as long as they’ve set up a sound investment strategy and found the perfect property to work with.

These loans can act as the financial bridge that allows people in the early stages of their careers to explore the world of real estate investment, much like the practice of buying foreclosures without putting money down. They open up doors for potential profits to be made, even for those who can’t start independently.

Types of Fix and Flip Loans

It’s important to remember that fix and flip loans come in a variety of forms, with each having its own benefits and drawbacks. By better understanding the loans in all of their incarnations, you can make an informed decision that truly suits your needs and financial situation.

We’ve broken down the most common forms of fix and flip loans, including:

  • Hard Money Loans
  • Private Money Loans
  • Home Equity Loans and Lines of Credit (HELOC)
  • Personal Loans

It’s important to have a strong knowledge of each, so you can make the decision that’s right for you.

Hard Money Loans

These are the most common loans when it comes to fix and flip projects. Hard money loans are generally provided by private investors or companies, being secured by the allure of the property. While they are a fast, short-term solution to a financial hurdle, they often come with pretty hefty interest rates, ranging between 7% and 15%, which is a reflection of how risky a house flip actually is. They do, however, move quickly and typically have flexible lending criteria.

If you’re coming from a place of poor credit and have found the perfect property, hard money loans are a viable option. Still, they’re a high-risk choice for first-time flippers.

Pros:

  • Fast way to secure funding
  • Lenient credit requirements
  • Focused on the potential profitability of the property

Cons:

  • High interest rates & risk
  • Short repayment terms
  • Potential for high fees

Private Money Loans

Much like hard money loans, private money loans are secured by the property that you’re working with and the potential it has to make a profit. These loans come from private investors, but they’re generally not part of wider lending businesses. A private money loan is more likely to come from friends, family members, personal connections, and business acquaintances.

These kinds of loans have the advantage of there being a base level of trust between both parties, meaning interest rates and payback times can be negotiated in a more compassionate way. However, when considering a private money loan, it’s also important to remember that it can strain important relationships, especially if the investment doesn’t pan out.

Pros:

  • Potentially lower interest rates
  • Flexible terms
  • Fair negotiations
  • Informal application process

Cons:

  • Potential risk to personal relationships
  • Less regulated (no contracts, etc.)
  • Potentially limited loan amounts

Home Equity Loans and Lines of Credit (HELOC)

Home equity loans and lines of credit (HELOC) are financing strategies for people who already own a property with significant value. The practice is essentially borrowing against the value of your existing home, with your position as a property owner providing lower interest rates. Though, they come with the risk of the borrower losing their home to the lender if they default on their payments.
Any loan comes with its own unique set of risks, but HELOC should be reserved for those with rock-solid flipping strategies. Losing your home is a step beyond accruing some debt.

Pros:

  • Lower interest rates
  • Tax-deductible interest
  • Long-term repayment periods

Cons:

  • Risk to your primary residence
  • High levels of equity are required for eligibility
  • Potential for hefty fees

Personal Loans

Personal loans are loans that are based on the borrower’s creditworthiness. They can be provided by private parties or financial institutions and can be used as a jumping-off point for flipping houses. However, the nature of personal loans means that they come with higher interest rates with lower maximum loan amounts.

Personal loans can be a great choice for those with good credit looking to subsidize the funding of a house flip, but they’re not the best choice for fresh starters.

Pros:

  • No property collateral required
  • Versatile uses

Cons:

  • Higher interest rates
  • Lower loan amounts
  • Stringent credit requirements

By understanding these different forms of fix and flip loans, you can take steps in the financial path that makes the most sense for your situation. Whether you’re looking for off-market opportunities or already have a place in mind, make sure to consider your credit score, the profit potential of the project, and your general personal circumstances.

Understanding the Fix and Flip Process

Knowing how to start flipping houses isn’t just about securing financing. In fact, that’s only half the battle. Before you start trying to find funding, it’s vital that you have a comprehensive understanding of the entire process.

Step 1: Research and Planning

Before you start applying for your fix and flip loan, you need to know exactly what kind of property you’re looking for, where it’s located, and what the local real estate market looks like in that area. Make sure to do your due diligence when it comes to planning and market research.

Step 2: Securing Financing

Once you’ve clearly mapped out your plan, it’s time to secure the necessary funding for your project. Choose from one of the loan options we described above, ensuring that you’ve figured out exactly how and when you’re going to pay off the debt.

Step 3: Property Acquisition

With the money you’ve secured, it’s time to purchase the property. Make sure to give the place a thorough, meticulous inspection, even hiring a professional if need be, before putting money down. You don’t want to be caught off guard by surprise costs later in the renovation process.

Step 4: Renovations

Now that the keys are in your hand, it’s time to begin the renovation process. This involves repairing damaged parts of the property and making upgrades where you can, bringing the market value back up.

Step 5: Selling the Property

Now that the property has been revitalized with your renovations, it’s time to get selling. The aim of this entire process is to sell the property at a price that covers the purchase cost, renovation expenses, and any loan repayments while also leaving behind a sizeable profit.

Conclusion

Now that you’re aware of the different fix and flip lenders, how the process actually pans out, and the risks associated with this kind of investment, you can truly start to consider whether it’s the right next step for you.

Flipping houses can be a fun, exciting, and highly rewarding way to enter the real estate industry, in both personal and financial terms. By using fix and flip loans, beginners can get their start in this unique branch of the market.

The journey is complex, but with the right amount of focus, dedication, and careful planning, it can be a hugely profitable investment strategy. If you’re eager to make your first steps, find the right fix and flip loan for you, then get flipping!

For more interesting, useful articles about the real estate industry, check out our blog today.