Tips for Financing a Fix and Flip Property
Improving and reselling properties can be a lucrative way to build your investment income, and if you rehabilitate troubled properties into beautiful homes and long-term rental opportunities, you can even help contribute to the availability of safe and attractive housing in your community. When starting out in the fix and flip niche, your financing is going to be a major part of your recipe for success. There are a lot of options out there for you, and finding the right one means identifying how you want your business to work and what your available working capital is going to get you.
Self-financing is a worthy goal, but not a realistic way for newcomers to buy houses. Instead, many turn to loans that allow them to focus on funding the down payment and renovation costs with their own cash. Others find loans built to provide part or all of the funding for improvements, as well as the financing needed to close on the house. The thing to remember is that traditional mortgage loans are not likely to work very well for investment properties unless you are funding one project at a time and living in each one as your primary residence while you’re working on it.
Fix and flip loans are designed to help you fund these projects, often while paying interest-only payments during the lifespan of the loan. They’re designed to be short-term products, so most will only offer a financing window of 12-18 months, and they have a full principal balance due at termination. That means to effectively use them, you will need to plan wisely and know when you are delivering the home to the market. You can sometimes find longer-term bridge loans for flippers that go out to 24 or even 36 months, but finding them at the interest rate you like without having to pay on the principal could be a needle in a haystack situation.
This might make it seem like traditional commercial real estate loans are the choice for fix and flip properties when you don’t know what your time frame looks like, but that’s not really the case. Traditional loans take a long time to close and have stringent credit requirements, so they are not built for the fast-moving marketplace you are looking to join. Loans designed for flipping homes are a better choice. So what does that mean? It means you need to have a realistic sale price goal that lets you comfortably realize a return in the time frame your financing makes available. It’s the business, and making your money in real estate means learning to organize in that way.