Fix and Flip Loans
For those wishing to invest in property for the first time, or just expand an existing portfolio, the idea of “flipping” a property is incredibly attractive. A property is bought, improved (“fixed”) and then sold on for a profit. If done right, flipping can turn a modest property investment into a small fortune in relatively little time.
Most “flippers” will need to obtain financing to allow them to purchase the property and fund the development. This is where things begin to get complicated. Purchasing a property with an intent to flip is different to obtaining a standard mortgage. Investors will need to take their pick from one of the six different loan types that can be used for “fix and flip”. These are:
A Hard Money Loan
A hard money loan is a short-term loan; the entire flip process, from purchase to renovation to sale, is usually completed within one year of the loan date.
- High approval ratings
- Quick application processing
- High level of pressure to complete flip on schedule
- Credit score of at least 550 usually required to qualify
Fix and Flip Cash Out Refinance
This kind of loan may sound like a mouthful, but it’s actually relatively simple. Property investors use this kind of loan to release equity in other properties, which they then use to finance a new development. The existing property that will be used to finance the development must be fully paid off to be used for this purpose.
- Puts existing equity to good use
- Helps to extend the property portfolio of existing developers
- Not suitable for new developers
- If the loan is defaulted on, the existing property is at risk also
Fix and Flip Home Equity Line of Credit
This kind of loan is similar to the Cash Out Finance option, but has one major difference: the property used as equity does not have to be fully paid off (i.e. it can still be mortgaged). Most of these loans are taken out against the primary residence of the investor rather than other investment properties.
- Good route into flipping for novice investors
- Interest is only charged for as long as the balance is active; these loans are more similar to a credit card than a standard, fixed loan term
- The home of the developer is in jeopardy if the loan is defaulted on
- Requires developers to be owner-occupiers of property (so not suitable for developers currently living in rental accommodation)
Fix and Flip Property Line of Credit
A similar structure to the Home Equity Line of Credit, including the “credit card”-esque feature, a Property Line of Credit using an investment property rather than the developer’s own home to finance a new project.
- Line of credit can be up to 80% of the value of an existing portfolio
- The property used for this line of credit can still be mortgaged
- Not suitable for new investors
- Existing property is at risk if the loan is defaulted on
Fix and Flip Bridge Loan
A bridge loan is a temporary loan that covers the gap between two property developments. It is used to purchase a second property before the original property is sold, allowing for continued development while a buyer for the first property is found.
- Provides good continuity between projects
- Allows a developer to chain projects together to drive increased revenue
- Both the new and existing projects are in jeopardy if the loan is defaulted on
- Unsuitable for first-time flippers
It is important for any investor to carefully consider their financial choices before selecting their loan. Borrowing to fund property investment is complex and subjective but, hopefully, the above should have helped to provide clarity to an often-confusing landscape.