In the last decade, the housing market was hit worst by the economic recession, and many investors lost their money. In recent years, there’s been steady growth, and the market seems to stabilize. The recent growth has come along with many developments, including the fix and flip concept. Investors are reaping huge profits by purchasing houses, renovating and then selling them at a profit.
In 2017, the fix and flip business were booming where investors renovated more than 200,000 homes. Majority of the investors were smiling all the way to the bank having pocketed an average of $68,143 per property. Although fix and flip business have promising returns, the business is not for everyone. For most of the starters, it’s very challenging to venture into this business. Here’s why.
It’s costly to finance fix and flip project
Unless you are extremely wealthy, you will find it hard to venture into house flipping. The biggest challenge for most people is the lack of enough capital. You will need money to purchase the house, pay for the renovations, pay all the holding fees, and even money to market the property. Fortunately, nowadays investors have multiple options of raising money for their house flipping projects. Fix and flip loan is the most popular among the available options.
What are fix and flip loans?
Initially, investors relied on conventional mortgages and traditional bank loans to raise funds for purchasing a property. These loans are usually long-term and hard to access. A bank will require a lot of paperwork before they can approve your loan application. Most of the people can’t access these loans because they lack a perfect credit score or collateral required by banks.
Fix and flip loan is a relatively new financing tool that enables short-term real estate investors to raise funds for their fix and flip projects. These loans are often accessed outside the traditional financing system. In most cases, a private investor or business issues the fix and flip loans as hard money.
Facts about the fix and flip loans
The typical length of a fix and the flip loan is usually between six and twelve months. The interest rate of these loans depends on the lender, and they range between 12-21 percent. It is possible that you can get a lower interest rate on your loan especially if you have done other flipping projects. The loan amount for most of the flipping projects is usually between 60 and 75 percent of the property’s value. The best thing about the fix and flip loans is that you require little or no documentation.
Why you should consider fix and flip loans
As highlighted earlier fix and flip projects usually run for a short time. Mostly, when you find a suitable property, you want to purchase it and start renovations almost immediately. Applying for funding from the banks isn’t an option because they take their sweet time to approve applications. Finding a lender who can lend you the money in less than a week can be a great advantage to you. This is where to fix and flip loans come in. Most of the fix and flip lender will approve your loan within a short time.
Also, most of the fix and flip lenders don’t look at your credit score, your debt-to-income ratio, or even your income. These lenders are looking out for the current value and the expected resale value of the property. The difference between the resale price and the current value determines the strength of the deal.
What to consider when applying for a fix and flip loan
Before you decide whether or not to apply for a fix and flip loan, you need to ask yourself a few questions.
1. What is the minimum amount you can pay for the property?
2. How much will the renovations cost?
3. How much will you pay interest and holding fees before finding a suitable buyer?
4. How much are you likely to sell the house for. Will it yield a profit?