Buying a run-down property only to renovate and resell it at a profit seems like a lucrative venture. That's especially true when television makes it look so easy. One of the hardest parts is obtaining the capital to afford the house and all the expenses that come with it, including renovations, taxes, insurance, utilities, and more.
Rather than pass up an irresistible fix-and-flip project due to lack of funds, there may be help at hand in the form of a loan! From hard money loans and cash-out refinances to home equity lines of credit and crowdfunding, let's take a look at the different methods of financing a fix-and-flip, along with the pros and cons of each.
Hard Money Loans
Hard money loans are intended for people who either don’t have good credit or expect to pay off the loan quickly — generally within one or two years. Private lenders provide these loans, as opposed to established banks. This makes it significantly easier to qualify for hard money loans than for traditional loans. Plus, the money is usually available in less than 15 days.
Rates are higher for hard money loans, however, and generally range between 8% and 12%. You'll also have to repay the loan on the agreed-upon date, even if your fix-and-flip property hasn't yet sold.
This option involves refinancing an existing property to fund the purchase of your new fix-and-flip property.
You obtain a new loan that’s slightly higher than the value of your present home. The new loan will pay off the existing mortgage and, depending on how much equity you've established in your current home, you may have money left over to invest in your fix-and-flip.
Rates are often cheaper than standard mortgages, but this type of financing is only available to existing property owners with a significant amount of equity.
Home Equity Loan or Line of Credit (HELOC)
A home equity loan or line of credit is also beneficial to those who have built equity in their existing property. It allows you to borrow money by utilizing the equity in your property as collateral. In fact, many mortgage lenders would allow you to borrow up to 85% of your home's equity on a second mortgage.
A HELOC, in particular, can provide great flexibility. Once granted, you can then access the money in small portions over the length of the loan's draw period. You’ll only pay interest on the amount you have withdrawn, making it a good alternative for slower fix-and-flip projects. Additionally, you won’t have to pay interest on any amount of the HELOC that you haven't yet withdrawn.
Real estate crowdfunding platforms are gaining popularity as a new option for people to obtain financing for fix-and-flip projects. They operate by pooling smaller contributions from numerous investors to fund a costly project.
Investors earn by either collecting interest or receiving a share of the profits. Crowdfunding real estate can be risky, particularly because it’s relatively new and lacks a consistent track record. If you've had trouble finding finance elsewhere, though, it’s worth looking into.
Fix-and-Flip Financing: The Bottom Line
When done correctly, flipping a property can be a rewarding experience. In a short period of time, you can make savvy renovations and sell the house for a considerable profit. Of course, investing in a fix-and-flip does require some upfront costs. Obtaining financing for a real estate investment is never without its risks. Always do your homework to ensure your method of funding suits your individual needs.
Want to learn more about funding your fix-and-flip project? Check out our Academy course: Fix and Flip Like a Pro: Find Properties & Maximize ROI!