Have you ever seen the shows Flip This House, Property Brothers, or any of the Flipping series? They’re exciting, right? The storyline is always the same: the investor finds a property, starts rehab, runs into issues, finishes the house, and — finally — sells it for a profit. However, there’s one thing that none of these shows cover: how the heck do they finance it?
Know What You Can Use The Loan For
Maybe to some, the financing side of real estate is not as exciting as dealing with sellers, buyers, and contractors, but it is probably far more critical. If you can’t secure funding to buy and rehab a house, there is no deal. Here are the upfront costs to consider when looking for fix-and-flip funding.
Cover Purchase Costs
The most obvious cost is the real estate’s sticker price. The loan should cover some or all of the purchase price.
Cover Renovation Costs
The lenders that understand the fix-and-flip business will often consider loaning you money for renovations. Such a loan will be very similar to a construction loan and will be issued either to you or directly to your contractors in draws as work is complete.
Cover Closing Costs
There are many other costs associated with buying a house. You will need to pay for title insurance, title fees, recording and transfer fees, and lender fees. With the right lender, some or all of these fees can be rolled into your fix-and-flip loan.
Find A Team Of Collaborators
When you are starting in the fix-and-flip business, you will need a team. Your lender is an essential member of that team, but it takes a much larger team to get to the closing table. Here are the most important members you and your lender need to rely on when buying a property to flip.
Both you and your lender will want to make sure the property is insured. It sounds simple but insuring a fix-and-flip is quite different than insuring other types of properties. If you have an insurance agent who is not familiar with fix-and-flips, they will likely ask you one question when deciding which policy path to take: “Do you plan to live in the home?” The answer to that question is obvious, and when you tell them no, they may take you down the landlord policy path. That would be the correct policy if you planned to rent the home out; however, those policies have a vacancy clause.
A vacancy clause states that if the home is vacant for a certain amount of time (usually 30 to 60 days), the policy is void. Since your fix and flip will almost certainly stay vacant, you will effectively have no insurance at all. Think about it, what is riskier to an insurance company — a house that is occupied or a house that is vacant with people on ladders using power tools? An experienced insurer will understand all this and keep you safe.
Most title companies are pretty much the same. They offer similar services for similar prices, and they get their insurance from one of the large title insurers. Since the policies come from the same place and the service is virtually identical, why is it crucial to have a strong title company on the team? Because title companies that work in the fix-and-flip business understand the unique needs of real estate investors. They understand the demand for quick closings, creative investor transactions, and how to save money. They can even help with marketing to find more deals to buy. Finally, they are sure to offer the correct endorsements to protect you and your lender.
In most cases, this is more for the lender than for you as the investor, but a good appraiser can help determine the property’s value once it is repaired.
Although less critical from the lending side, a good CPA is worth their weight in gold to real estate investors. There are too many loopholes and tax advantages in real estate for most investors to keep up with. Without taking advantage of such loopholes, you may be leaving thousands of dollars in profit out there for the government to scoop up.
In addition to your lender, the Realtor is one of the most important members of your team. Realtors are extremely valuable because they can help you locate opportunities and will help you sell when the project is done. They can get you into houses to view your competition and give you advice on what finishes are needed to get top dollar. They can also help get you comparable sales when looking at deals to buy so you can determine if it is a good deal or not. Spend time finding the right Realtor because this is one team member that will pay dividends year after year.
Can A Beginner Get A Loan To Fix And Flip Homes?
We all need to start somewhere. I will admit that it is much harder for beginners because lenders typically want to see that a borrower has experience. Ask your lender what it will take to move past this obstacle. You should have no trouble if you work with a fix-and-flip lender with a reliable team in place.
The Best Financing Options For Beginners
Here are the most common ways to finance fix and flips.
A home equity line of credit is a revolving account secured by a property. Revolving means that you have access to the money at any time, and if you borrow it, you can pay back what you took out and use it again. Since the collateral for a HELOC is likely another property you own, you can use a HELOC and offer cash on the fix-and-flip purchase. The advantage to using a HELOC is extremely low loan fees and usually a great interest rate. It will also work like cash, so you will have a more competitive offer.
I wanted to touch on conventional loans because many beginner real estate investors will call their mortgage broker for help with funding. The problem with conventional loans is that they are meant to be long-term loans, which can cause problems for your lender if you pay them off quickly. They are also not meant for rehabs, so they will not help with any renovation costs.
If you have friends, family, or colleagues with some extra cash sitting around, you can potentially borrow from them. The big advantage here is that you will have unlimited flexibility. You can borrow 100% of the deal, including rehab and closing costs, if the lender allows it. You can also negotiate better interest rates than you will find with hard money lenders and banks. Many real estate investors will use private financing at some point in their careers.
Community bank lenders are a great way to fund fix and flips. Local banks that understand this business are ok with the short-term nature of a fix-and-flip loan and will often approve loans to cover renovation costs as well. Interest rates at a bank are typically very attractive, meaning you will make more money on your deals. The downside is they are harder to qualify for and can take some time. If you are just getting started, are not a strong borrower, or need to close fast, a community bank may not be the best option.
Hard Money Loan
Maybe I am biased as a hard money lender, but these are perfect loans for fix-and-flippers. Many hard money lenders focus on fix-and-flip loans, so they understand the business very well. Hard money lenders can get deals done that other lenders cannot. With hard money lenders, it’s possible to borrow everything you need to buy a house, including the purchase, renovation, and closing costs. The only downside is it is more expensive.
How To Give Lenders More Assurance
Fix-and-flip lenders want to know that they are going to get paid back. Consider these strategies when applying for a loan.
1. Create A Plan For Every Flip
Show the lender that you have a plan to pay them back. Provide a breakdown of the renovation plan, including the finishes you want to use. If the renovation is extensive, show them photos and drawings of what the finished project will look like.
2. Estimate The Renovation Cost
Once you show them what you will be doing, the lender can start working on the finished value. You will still need to provide your budget, though. Give them a breakdown, in as much detail as you can, of what it will cost you to do the job.
3. Join Communities & Build Your Network
Part of your job is to continue to meet new people, and lenders love to see you out and about at educational events. Explaining what education programs and communities you are a part of will help build confidence.
4. Outline Who Your Team Is
Outlining your team is especially important for beginners. Lenders want to know that you are surrounding yourself with quality people. You will run into challenges, so knowing you have the means to get through them is vital when it comes to loan approval.
Where To Look For Lenders
The most important item to look for when searching for a fix-and-flip lender is that they understand the fix-and-flip business. From there, you will want to know how their loans work and what it takes to qualify. Each lender, especially in the hard money lending space, works a little differently. You can find most of this information on the lender’s website, but it is best to pick up the phone and call. I have found that many lenders don’t answer their phone, and it takes days to hear back — if a return call comes at all. You will want a lender on your side who will be there for you when you need them. If they cannot return a call, I would consider a different lender. Pine Financial group understands fix-and-flips. Every one of our loan officers has flipped houses, and house flipping loans is our focus.
When You’re An Expert At Renovating Houses But Never Flipped Before
It is very common for contractors to want to flip their own houses. Many great contractors have done renovations for other investors and have watched them make all the money. At some point, they want in! The two most significant risks for a fix-and-flip deal are missing your budget and missing your estimated sales price. Being a contractor with years of experience will help tremendously with your budget and give your lender a ton of confidence. However, you still need to be sure you are doing the renovation with the quality required to hit your numbers. A great Realtor is an essential member of your team for this reason. With a great agent and your experience, a fix and flip loan should be no problem.
Reaching Out For Help
Flipping houses (or trying to flip houses) can become overwhelming. We are here to help! The team at Pine Financial Group has years of experience with fixing and flipping houses. Between our deals and our clients’ deals, we have the experience and expertise needed to tackle the fiercest challenges. Need a little hand-holding? Give us a call.