Why Should You Use a Loan to Fix and Flip a House?
Did you know you could use a loan to fix and flip a house? Check out our complete guide on why it is smart to use a loan to fix and flip a house.
It’s dilapidated, it’s dingy, it’s perfect! When you find a great fix-and-flip, you want to act fast so it doesn’t slip away.
Is it smart to tie up all your cash with one project? What if you’d like to keep some of your liquidated assets for other opportunities? Consider using a loan to purchase fix and flip homes.
The good news is, there are several options available for fix and flip loans. Keep reading to find out more.
Why Get a Loan for a Fix and Flip?
Investors have several reasons for choosing to use a fix and flip lender. Having enough cash for a house fix and flip doesn’t mean it’s smart to use it all on one project.
Cash Is King
If you’re a real estate investor, you know this is true. Having cash on hand will allow you to snatch up deals on that next auction.
Many distressed property sellers want to get rid of the house fast. This means they don’t want to wait for you to make that deal with a family member. Conventional mortgage loan processes take months to complete.
If you are able to secure a loan prior to your fix and flip offer, you’ll have the cash you need to seal the deal fast.
Having a secured loan gives you the cash you need, when you need it. This allows you to compete on the same playing field as other investors. They’ll have cash and so will you.
Keep Liquid Assets Liquid
Some fix and flippers may pay cash at an auction and take out a loan after the sale. This allows investors to free up their cash for other purposes.
What if another great opportunity presents itself while you’re in the middle of renovations for the fix and flip? You’ll be in a much better position to diversify your investments if you have cash for more than one project.
Using a loan for a fix and flip allows you the freedom to place your cash elsewhere.
Provide You With Funds You Need
Maybe you don’t have the cash you need for that perfect fix and flip. By using a loan, you can get the funds you need for your investments.
Depending on the type of loan, you can also find funds to help with renovations. Getting the extra financial boost from a loan may be just what you need. If you have the cash to fund a purchase but not the fixes, a loan will help with that.
Motivation to Move Fast
Working with a fix and flip lender is a great way to give yourself a timeline. Construction projects often take longer than expected. This can cause some fix and flippers to lose motivation with their projects.
If you’re paying interest on a loan, however, you have reason to keep moving. The longer you wait to sell that property, the more it will cost you.
Hard Money Loans
Did you know there are several different options for fix and flip loans?
If you’re wondering how to fix and flip a home using a loan, start here. Hard money loans offer more flexible terms than conventional (or soft money) loans.
Hard money loans are short-term. The average length of a short term loan contract is 6 to 18 months.
Hard money loans typically have higher interest rates than conventional loans. For example, the average rate for a conventional loan is currently 2.78%. For a hard money loan, the average interest rate is 10% – 18%.
Because these loans are shorter term, they cost more to hold.
Hard money loans will take the current property as collateral. If you default on your loan, the lender will repossess your fix and flip property.
Most hard money loans are given out by private lenders. Fix and flip lenders aren’t as concerned with credit scores and financial background. Hard money loan lenders appreciate the potential of the property they’re funding.
If you have a credit score higher than 660 your chances are pretty good for getting a hard money loan for your next fix and flip.
Most hard money lenders won’t wait too long to provide you with funds. Some loans are secured in less than five days.
Keep reading to find out more about different types of hard money loans.
Cash Out Refinance
Using the equity you’re sitting on and turning it to cash you can use is a great way to fund your fix and flip home. If you currently own a large part of your home, you can liquidate what you own.
This allows you to have cash in hand for that auction home or fast deal!
In order to qualify for a cash out refinance, you must have enough equity in your current home. Lenders usually require a 45% DTI or above to qualify.
Most lenders will ask for what purpose you’re using the cash. Be honest, and tell them you’re using it for real estate investing purposes.
A great advantage to cash out refinancing is you’re the ultimate lender. You already have the money, you’re just liquidating it.
You should be careful not to take too much out of your current assets, however. Spreading yourself too thin financially can lead to stress and loan default.
The cash out refinancing process can take up to 45 days. If you’re planning to use cash out refinancing to get cash, plan ahead so you have it available when you need it.
You’ll also be required to pay off any existing liens against your home before using the cash to invest.
Home Equity Line of Credit
A home equity line of credit, or HELOC, is a great way to borrow money for your fix and flip. A HELOC is essentially a credit card borrowed against your current house.
You’ll only pay interest on what you use. If you don’t’ need the entire amount of a HELOC, you won’t have to pay for it.
Most lenders require a credit score of 640 or higher. Interest rates for a HELOC are usually 3.5%-6.5%.
By using a HELOC, you can keep your existing home’s mortgage as it is. There’s no need to rework what you already have. A HELOC simply adds credit line to your home.
There are currently no restrictions on how you use a HELOC. This gives fix and flippers nice flexibility to use the funds where they are most needed.
HELOCs typically take a month to 45 days for finalization. If you need cash before then, consider a faster lender.
Investment Equity Line of Credit
Maybe you’d rather not add a HELOC to your home but like the concept. An equity line of credit, or LOC, allows you to use a non-owner occupied property.
A LOC has similar terms as a HELOC, except you need to claim how you will use it.
These do what they sound like, “bridge” the financial gap for your fix and flip purchase. If you have an existing property that has not sold, a bridge loan allows you to get funds without a sales contingency.
On average, a bridge loan will take about 15 days to secure. Giving yourself a little over two weeks of lead time before that next auction doesn’t seem so bad, right?
If you’re expecting a long-term loan solution, a bridge loan isn’t for you. Loan terms last 12-18 months. This provides great motivation to get your fix and flip homes moving fast!
Bridge loans often have very high interest rates, up to 7.9%. These loans also require the borrower to state exactly how they plan to use the money.
They also require you to either sell or refinance by the contract’s end.
Beware of Sharks
While finding private money lenders is a great way to fund your fix and flip, it comes with risk. Be sure you’re borrowing from a reputable source and not a loan shark.
Loan sharks prey on those with bad credit looking for cash fast. Unfortunately, many loan sharks are involved in illegal practices.
Before entering into a contract with a fix and flip lender, do your homework. What kind of reputation does the lender have with other lenders? Ask around your area’s real estate investing groups.
Most real estate investors, especially fix and flippers, love helping each other out.
If a lender won’t provide you with paperwork or asks for your passport or social security information as collateral, run (don’t walk) away!
Fix and Flip Smart
You’re a smart investor, your fix and flip lender should be, too. Using a loan to purchase your next fix and flip property just makes sense.
Finding a fix and flip lender will help you keep the cash you have. Fix and flip loans also allow you to use current assets to further your financial portfolio.
Not sure where to look? Stop here! Fill out an application or contact us today.
We’d love to partner with you on your next fix and flip adventure.