Saturday, January 20, 2018
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There’s nothing more fun than watching the experts “fix and flip” homes on networks like HGTV. Whether we’re in awe of the finished product or think to ourselves, “I could have done better,” we always long to see more. Turn-key homes are fabulous but there is something so inspirational about watching someone take a home that seemed unlovable and turn it into something unbelievable. If you’ve often thought this line of work would be a good fit for you, you might be wondering how to drum up the cash for the pursuit. Read on for tips on how to finance a fix and flip for a real estate investment.
Secure a Loan
More specifically, you’ll want a hard money loan. As this article by Investopedia.com points out, experts often disagree on what this term actually means:
“Some say it refers to the fact that it is much more expensive than traditional financing and has ‘harder’ terms. Others say it’s because it finances houses that are ‘hard’ for conventional lenders to finance. Still others say the term describes the collateral for the loan: a hard asset, which in this case is real estate.”
The reason a hard money loan works so well for flipping houses is because you don’t have to pay the points until the home sells. This means you can finance a house flip without putting up any of your own funds to do so. A hard money loan typically has terms of less than one year and interest rates of between 12 and 18 percent, plus two to five points.
Keep in mind when getting a loan that you’ll need money for closing costs, rehab costs, selling expenses, lender fees, real estate agent commissions, and marketing. Those who don’t factor this in will not be successful. Those who understand the need to stick to this budget, however, will likely come out ahead and will be poised to flip that next house. If you’re in Arizona and are interested in this option, be sure to check out Scottsdale hard money lenders.
Cash Out Refinance
This is typically used by experienced “flippers”, as a cash out refinance is when an investor refinances an existing property to therefore invest in a new property. It leverages the equity from the property that’s already owned in order to issue a new loan. This is considered a “first lien”, which means that any existing liens must be paid before taking advantage of the equity. The difference in the amount between the new loan and old mortgage is the cash that can be used to finance the fix and flips. People who use this option will often also incorporate a hard money loan to finance what the cash out refinance won’t cover.
Permanent Bank Loan and Online Mortgage
This option typically isn’t for rehabbers, as these loans typically include 15 to 30-year terms. They’re long-term loans issued by a Fannie Mae-approved or FHA-approved lender. However, if the property is in good condition, this might be an option, but is still often too lengthy for flippers to consider. There are exceptions, however; the FHA 203(k) loan includes renovations and purchase of a primary residence, and the Fannie Mae HomeStyle loan finances the purchase of a one-unit investment property.
Get a Home Equity Line of Credit
As an investor, you’ll be given a line of credit based on the value of your existing home to be used at will over its term. You will be subject to interest rates just as if you are using a credit card. The thing that makes this ideal for fix and flip investors is that there are no restrictions on what is done with the capital. And unlike a cash out refinance, it can be both a first or second lien. In other words, it can be taken out in addition to your existing mortgage. As this FitsSmallBusiness.com article notes, “The draw period lasts between 5-10 years and during this time fix and flip investors can borrow up to the credit limit. The repayment period is typically 20 years and during this time fix and flip investors repay what they borrowed.”
Fix and flipping isn’t for the faint of heart. It takes hard work, perseverance, and financing. If you’ve got all three, it can be one of the most rewarding gigs you’ll ever experience. If you enlist these tips to secure the financing, it could be time for the fun fix and fortuitous flip.
The post How to Finance a Fix and Flip appeared first on Home Business Magazine.
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