Real estate investments can take many forms. If you’d like to earn consistent income from your property, investing in a long-term rental is likely your best bet. If you’re willing to take on more risk with your investments, consider the fix-and-flip strategy. This strategy involves buying a dilapidated property, renovating it, and selling it for a sizable profit.
To perform the fix-and-flip strategy, you must obtain short-term loans that give you the financing you need to buy real estate. This guide explores fix-and-flip loans and provides a step-by-step look at how to apply for them.
What Are Fix-and-Flip Loans?
A fix-and-flip loan is a type of short-term financing that’s meant to help investors buy a property and restore its condition before selling it. Like most short-term loans, the interest rates can be somewhat high and often range from 8%-12%.
Once you receive this loan, you’ll have the funding you need to improve the property and make upgrades that will increase its value. After these renovations have been completed, you can sell the home for a profit. Even though these loans come with a certain amount of risk, they can provide you with a high ROI if you know what you’re doing.
How a Fix-and-Flip Loan Works
To qualify for this type of loan, you must show lenders that you have a comprehensive renovation plan, a great credit score, and a property that you’ve made an offer on. The amount you’re able to borrow often depends on the home’s after-repair value (ARV).
Non-QM loans are designed to be provided to borrowers who may not meet the requirements that are part of a qualified mortgage. For example, self-employed borrowers who don’t receive income directly from an employer would be unable to provide lenders with W2s, which is why they may need to apply for non-QM loans. High debt and major credit issues are a couple of other reasons why borrowers seek non-QM loans.
Most fix-and-flip loans come with terms that last for 12-18 months, which means that you’ll need to complete the renovations and sell the property by the end of the term. You may be able to obtain a loan that comes with interest-only payments until the loan’s due date. In this scenario, you should be able to minimize your borrowing costs in the months before you flip the property.
Benefits of a Fix-and-Flip Loan
If you have any interest in the fix-and-flip strategy, you need to obtain short-term financing that will help you add these properties to your investment portfolio. There are many benefits of applying for a fix-and-flip loan, which include everything from flexible terms to quick funding.
For example, let’s say that you’re looking to bid on an auctioned property or a foreclosure. You need to get cash quickly. While standard mortgage loans have a closing process that can last longer than a month, you can receive the funds from a fix-and-flip loan in less than a week.
There’s also less risk associated with this type of loan. While a standard mortgage loan is backed by your property and personal credit, a fix-and-flip loan is only secured by the property you’re investing in.
Traditional loans come with strict lending terms. In comparison, the terms for a fix-and-flip loan are much more flexible. You may be able to obtain approval with a lower credit score or less income. If you already invest in long-term rentals, this strategy is a great way to diversify your portfolio.
How to Obtain a Fix-and-Flip Loan
Before you apply for a fix-and-flip loan, consider the steps you need to take to ensure this process goes smoothly and your application is approved
Gather Financial Documentation
While the terms for a fix-and-flip loan are more flexible, it’s still necessary to submit certain documents with your application. Lenders are more likely to approve these loans if you can provide a comprehensive overview of your project, which includes a market analysis, an estimated budget, and in-depth financial projections. Once your lender receives these details, they’ll have what they need to determine if you can flip the property and repay the loan quickly.
Find the Right Lender
Once you create a thorough business plan and know what you’re looking for in a fix-and-flip loan, you’ll need to research possible lenders. Traditional banks usually aren’t willing to offer this kind of short-term financing. While you don’t take on much risk when applying for a fix-and-flip loan, the lender does. Because of the higher level of risk, you’ll likely need to source this funding from non-traditional lenders. These lenders may be able to finance up to 92.5% of the purchase price for a fix-and-flip property.
When you’re comparing your options, consider factors like repayment terms, loan terms, fees, and interest rates. It’s also highly recommended that you compare loan-to-value ratios and look into the availability of interest-only payments. Consider whether the loan is tied to the ARV or current property value.
Fill Out Your Application
After you find the right lender, all that’s left to do is fill out and submit your application. Make sure you provide the supporting documents that will help you obtain approval. As mentioned previously, you’ll likely need to provide info about your project plan, budget, financial projections, and timeline. This information helps lenders determine your creditworthiness. Even if a lender doesn’t ask for these documents, you should include them.
Keep in mind that investors with fix-and-flip experience are more likely to receive approval than those who are new to investing. You may need to provide additional information about your business and personal finances to gain approval if you’ve never flipped properties before.
Close the Loan
Once the loan is approved and you sign all the necessary paperwork, you can get started on your project. Inform your lender of any updates while you renovate the property. You must also make your payments on time to ensure the loan remains in good standing. If you make multiple late payments, you may be at risk of losing the property in foreclosure.
A fix-and-flip loan is the perfect solution for investors who want to purchase run-down properties, fix them up, and sell them for a profit. It’s a short-term strategy that allows you to add numerous properties to your portfolio that could generate high returns. Get in touch with our staff at LoantPathLoans today to learn more about fix-and-flip loans and the investment strategy they’re used for.
