People who want to fix and flip houses for a profit are moving into an exciting business, but you have to know what you’re doing to have success.
Most people need to work with private and hard money lenders to get the money they need for a fix and flip loan. This is because most fixer uppers don’t qualify for traditional loans because of the condition and it’s an investment property, not your own residence.
The Costs Of Flipping Houses
This can be a lucrative business, but it takes a lot of cash to flip a house than it does to buy a regular house with a mortgage. You need funds to buy the house cash, rehab it and pay for taxes, utilities and insurance from the day it closes until you sell.
Also, you will need to pay a capital gains tax of 10% to 37% depending on your tax bracket. This will lower any profits you make on houses that you flip within a year. If you don’t have a lot of cash, it will be difficult to get into flipping houses. The most common way to get a loan for a flip is through a hard money lender.
These lenders have higher fees and expenses than regular lenders, but you can still make a nice profit if you get the house for the right price and do the rehab affordably.
6 Things To Remember With Fix And Flip Loans
If you want to get a fix and flip loan to rehab a rental property, you need to remember you’re entering a different world from conventional, residential mortgages. Many people who get into this business don’t realize just how different it is from conventional, residential real estate. But don’t worry, you can learn how to do it!
Here are some key things to keep in mind:
Unconventional Financing Is The Norm
Flipping houses is much riskier than a residential loan. That’s why it can be difficult for new house flippers to get approved for a conventional loan, which is why you may need to go to a private or hard money lender.
The good news is there are lots of fix and flip loan providers out there, and many of them base the loan on the property’s after repair value (ARV) and not on your personal credit.
Be Ready To Research Loans
Fix and flip lenders are separate from the residential market, which is highly regulated. So, you will find lenders with many different interest rates and fees.
This means it really pays to shop around for a fix and flip loan. Here are some of the variables you’ll run into when your loan shopping:
- How much of the cost the lender will cover. It’s rare that you can find a lender that will cover 100% of the property cost and repair. They realize if you don’t have skin in the game, you may not be as motivated to finish the job. So, many lenders will want you to come up with 20% or 30% of the cost yourself.
- Whether the loan covers only the property, the repairs, or both.
- How quickly you can get the money. Many hard money and private lenders will fund deals relatively quickly because they know that good deals get snapped up by other flippers.
- Whether you can meet the lender criteria. Some want good personal credit, but others don’t. Also, some may want to see that you’ve done fix and flips before. If not, you may need to JV with a fix and flipper who has been successful.
Higher Fees Are Customary
The first time you shop for a fix and flip loan, you may be shocked at the higher rates and fees. You can expect interest rates above 10% in most cases and there are usually 1% or 2% origination fees and renewal fees if the project takes longer than you thought.
But most fix and flip projects are completed in six months or less. So while you are paying a lot in interest and fees, it isn’t for long.
Get Ready To Work And Sell Quickly
Fix and flip loans have higher interest and fees, so you want to get your project finished and sold as quickly as possible. The less time you are shelling out 14% interest payments, the more money you can save.
You’ll Work Hard
Sometimes those ubiquitous fix and flip shows on TV do the business a disservice. They make it look easier than it is.
You need to find the right property in the right area at a good price. Just that part is challenging with all the competition you face.
Then, you need to do the rehab and repairs quickly without spending too much money. And you can expect that whatever rehab you plan, there will be additional costs and time involved.
If you take on a major fixer upper, that’s fine, but you should be ready to spend more money and two or three months on the rehab.
Be Ready To Spend Money
Most fix and flips are expensive. You’ll spend less in some areas and more in others, but you should expect to spend $50,000 or $100,000 at minimum to fix and flip most homes, and it could be a lot more, depending on the neighborhood.
And don’t forget to add in closing costs, inspections, permits, taxes, and agent costs.
Fixing and flipping houses can be a significant source of revenue. The first one or two projects can be challenging, but once you have those under your belt, you can probably find lenders with better terms.
Always remember to work with an experienced flipper and rehabber if you’re doing your first project. It’s always wise to benefit from others’ experience and mistakes so you have smoother sailing on your projects.
Talk to a lender today about funding your next fix and flip project and you could be on the way to fantastic profits.