Fix and flips are a great way to earn a living or to earn extra money. I have a great set up for financing my fix and flips, but many people struggle finding financing to buy fix and flips. I use portfolio loans and private money to finance my flips, but you can also use hard money. I complete 10 to 15 fix and flips a year and I use much of the income I earn from fix and flips to buy long-term rental properties. Even though fix and flips are a great way to make money, I think long-term rentals are the key to building wealth. There are many ways to finance fix and flips, although many of those ways are very expensive.
How do I find fix and flips?
The most difficult part of completing fix and flips is finding properties that I can buy cheap enough to flip. I wrote articles on how to buy properties below market value and how to get a great deal on a house. I have also written a 100 page E book on how to buy real estate below market value that discusses exactly how I buy properties that can be flipped or used as rentals. Once you find a fix and flip to buy, how do you finance the property?
Why can’t long-term financing be used on fix and flips?
It is not very difficult financing for long-term rental properties, unless you have more than four mortgages. Banks like to finance properties that will be held for the long-term. Banks do not like short-term loans because they make money on the interest paid on loans and stop making money as soon as a loan is paid off.
Most fix and flips are sold less than a year after they are bought. This is a very short loan term for banks and they do not like having long-term loans paid off in less than a year. In order to finance fix and flips, you have to find short-term financing, which is usually much more expensive and harder to find.
How does short-term financing work on fix and flips?
There are many different kinds of short-term financing. Hard money, private money and portfolio money can all be used in the short-term. Short-term financing is usually much more expensive than long-term financing because it is considered riskier and there is a much shorter period of interest collection.
Using a hard money lender to finance fix and flips
Hard money-lenders provide short-term financing that is usually less than one year long. Hard money lenders can have very flexible terms, but are also very expensive. A hard money-lender typically charges between 12 and 18 percent interest and 2 to 5 points. One point is equal to one percent of the loan amount and is charged on the loan amount. Many times the hard money-lender will not charge those points to the flipper until the house is sold and the loan is paid off.
How much money do you have to put down on a hard money loan?
The great thing about hard money loans is they allow someone to buy a property with little money down. I talk much more about hard money in this article, but you can base the loan off the value of the home after repairs are made. With most loans you have to base the loan off of the purchase price. If I were to buy a house for $75,000, but it is worth $150,000 after it is repaired, the hard money-lender would base the loan amount off the repaired value. That means I could potentially finance the entire purchase price plus some of the repairs.
Here is an example of a hard money loan that will finance 65% of the ARV (after repaired value) of a home.
- Purchase price $75,000
- ARV $150,000
- Repairs needed $30,000
- Loan amount of 65% of ARV = $97,500
- The entire purchase price and $22,500 of the repairs could be financed
Most hard money lenders like to see some skin in the game from their investors. That means they don’t want to lend 100% of the costs needed because they borrower has less incentive to make the deal work if something goes wrong. The costs involved with this hard money loan would be $3,900 for the 4 points and $6,825 for the interest if it was 14% over 6 months. The hard money-lender may also have appraisals and other fees that need to be considered.
Most hard money lenders lend in specific states and do not lend nationwide. If you are looking for a hard money lender in Southern California, North Coast Financial has some great programs.
Using private money to finance fix and flips
I use private money to finance a portion of my fix and flips. I get private money from my sister and use that money to help pay for down payments and repairs. Private money is a loan or investment from friends, family or investors. The loan is typically based on personal relationships and trust. Finding private money usually involves finding family or friends who are wiling to lend you money in return for a higher interest rate than they could get in a CD or bank.
Using portfolio lenders to finance fix and flips
I use a portfolio lender to finance my long-term rentals, because they will loan on more than four and more than ten properties. My portfolio lender will also lend short-term loans on my fix and flips. It is hard to find a lender who is not a hard money-lender that will finance fix as flips.
What are the terms of my short-term portfolio loan?
My portfolio lender lends me up to 75% of the purchase price on my fix and flips. I have to come up with the down payment and money to pay for repairs with this loan. I have to put more money into a flip with a portfolio loan, but the interest rate is lower than a hard money loan. I now pay 5.25% with 1.5 points on my loans with my fix and flips. My lender can complete a loan in two weeks and no appraisal is needed on loans less than $100,000.
The cost savings of using a portfolio lender and not a hard money-lender is easily seen here:
- $1,000 origination fee ($1,000 is the minimum)
- $1,476 interest over 6 months
However, I have to put 25% down on my portfolio loans so I need much more cash to purchase a flip.
Fix and Flip Your Way to Financial Freedom, is a full length book I wrote on flipping houses and is available at Amazon as a paperback or eBook. You can also get the book on my store here as a PDF.
Does using a loan on my fix and flips hurt my chances to buy properties?
Even though I am using financing to buy fix and flips, I write the offer as a cash deal. The market is very competitive and a cash offer is usually much more attractive to a seller. I am able to offer cash, because I do not include any loan conditions or appraisal contingency in my offer. If I have to pay cash I can, but I can buy many more properties by getting a loan.
How to use crowdfunding to finance flips
Crowdfunding is a brand new way to finance fix and flips. Crowdfunding works much like hard money, but instead of a lender loaning money, many investors loan the money. Much more information on crowdfunding can be found in this article.
Using a line of credit or a refinance to finance fix and flips
Another option for flippers is to use equity in real estate they already have to get cash. I have refinanced my personal house and multiple rental properties in order to get cash for new rental properties or fix and flips. If you have a lot of rentals, you will need a portfolio lender if you want to do a cash out refinance.
If you have equity in your personal residence, you can borrow up to 95 percent of the value with some banks either in the form of a line of credit or a refinance. The refinance will be more expensive, but will be longer term. The line of credit will be cheaper, but with shorter term and usually with a higher variable rate.
Partnering on fix and flips
Many people begin fix and flipping with a partner to gain access to capital. The partner provides capital in return for a share of the profits. This is a great way to get started, but it will cut into the profits. I partnered with my father when I started fix and flipping and it worked out great for years. He supplied the capital to buy and rehab the properties and I would find the fix and flips and manage the repairs. I prefer not to have a partner, because I can make all the decisions and I get to keep all the profits.
The hardest thing for most people when starting to fix and flip is finding the money to do it. A portfolio lender or private money can be a great option. If you have to use a hard money-lender make sure you account for how much it will cost. A hard money-lender can easily double or triple your financing costs. If you are interested in learning more about how to find flips, check out my investing program The Complete Blueprint for Successful Real Estate Investing.