Construction workers painting walls in fix and flip house

What’s the Best Way to Finance a Fix and Flip Project?

Fixing and flipping houses has a large potential for profit and may generate a nice stream of income. Some people are deterred from attempting fix and flip projects because it requires quite a bit of money for the renovations. The good news is that you don’t necessarily have to come up with this money all on your own. You can use mortgage loans, hard money loans, and other lending products to finance your fix and flip project. 

Fix and flip loan considerations

Each financing option has its pros and cons. You may be able to get good rates from traditional mortgage loans, but qualifying could take a lot of work and time. You may not be able to get the loan in time to make the purchase and complete the project. 

Family and friends might want to help out financially, but if the project goes badly, you could put your relationships at risk. Additionally, financing through friends and family members may not always have the best rates. 

When financing a fix and flip project, institutional lenders are typically the best option.  Bidding on the project is time-sensitive and you may miss out on an opportunity if you have to spend extra time while the bank is reviewing your project details. 

Hard money loan pros and cons

Real estate investors often use hard money loans to finance fixer-uppers that can later be sold for a potential profit. Hard money loans can provide fast, robust, and reliable financing for fix and flip projects, so real estate investors have the ability to place competitive bids and land their projects. 

The process for securing a hard money loan can be simple. You don't need to gather pay stubs and old W-2s to prove that you have the ability to repay the loan as you would with a traditional mortgage. Hard money lenders speed up the process to close because they can keep the approval requirements relatively minimal. 

Hard money loan advantages: 

  • Faster approval process and access to funds, compared to traditional loans.
  • Offer more flexibility without too many regulations attached.
  • Can use funds for financing renovation projects. 

Hard money loan disadvantages:

  • Higher interest rates than traditional mortgage loans.
  • Shorter repayment timeline.

Financing real estate projects with hard money

Hard money loans remain a convenient tool for house flippers because they can provide fast access to financing. Even though the loans typically come with higher interest rates compared to traditional mortgages, they are worth evaluating. Investors who are seeking hard money loans should be confident about the profit potential of their property when they use hard money loans, due to risks such as higher interest rates and shorter repayment terms. 

How to find a good hard money lender

When you are searching for funding for your fix and flip project, the number of lending options can seem overwhelming. Some lenders charge high interest rates to balance their risks and might try to take advantage of people who want loans fast for that reason. Here are some tips when searching for a lender.

  • Ask your friends and family members for referrals.
  • Ask industry professionals who they trust for hard money loans. 
  • Research the lenders online by looking at their websites, social media profiles, and reviews. 
  • Examine the lender's approval requirements. They are often listed on their website, and the lender will provide this information before you fill out the application. 

Hard money loan red flags

Not every hard money lender is the same and some of them have exorbitant interest rates that will eat away at your profits. When researching your hard money lender, you will want to fully understand all of the terms and conditions that are associated with your loan. 

There are some scammers that pose as hard money lenders. Proceed with caution if the lender is asking for an upfront fee associated with your application or otherwise. Most legitimate lenders collect fees in closing your loan. Be aware of the hard money loan red flags like unclear terms, data errors, and no collateral required. These can be signs of a disreputable lender, or worse, a bait-and-switch scammer.

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Disclaimer

The above is provided as a convenience and for informational purposes only; it does not constitute an endorsement or an approval by Kiavi of any of the products, services or opinions of the corporation or organization or individual. The information provided does not, and is not intended to, constitute legal, tax, or investment advice. Kiavi bears no responsibility for the accuracy, legality, or content of any external content sources.