Are you interested in getting into the fix and flip business? If so, you’ll need to get financing for your projects. This can be a bit tricky if you’re new to the game, but don’t worry—we’re here to help. In this post, we’ll introduce you to fix and flip loans for beginners and tell you how to get started. Keep reading to learn more!
What are Fix and Flip Loans?
A fix and flip loan is a type of loan that finances the purchase and renovation of a property. These loans are usually short-term, lasting anywhere from six months to one year.
Fix and flip loans are popular among real estate investors. It allows the investor to buy a property without having to put up a large sum of money for a down payment.
These loans differ from a regular mortgage or other types of loans. Characteristically, fix and flip loans are:
- Short term (6 months to 1 year)
- Interest only payments
- The asset (investment property) is held as collateral
The Asset as Collateral
Fix and flip loans are secured by the asset. The loan company takes a first lien position against the property. What this means is that in the case of default on the loan, the lender now has the right to foreclose on the property.
Fix and flip loans usually have an interest only period while you’re holding onto the property. The lender doesn’t expect the principle of the loan to be paid back until after you’ve sold the property.
Now that you know a little more about fix and flip loans, let’s move on to some tips on how to get approved!
The Tale of Two Lenders
People tend to think of traditional, institutional lenders such as banks when the think of getting a loan.
But did you know there is a ton of private money available from hard money lenders?
To understand the differences, let’s unpack each of these types of loans and what they require.
Traditional Lending Looks at the Borrower
Traditional lenders take a hard look at the borrower. They will use a business line of credit to fund a project like a fix and flip. These lenders give weight to a number of factors, including:
- Credit score
- Money for a down payment
- Income history, including W2 income
- Unpaid collections, bankruptcies, and foreclosures
- Delinquent accounts
- Number of recent applications for credit
- Employment history
This type of loan can be harder to get and the lending process longer than needed.
If you are a new investor or don’t have a high credit score, there are some things that you can do to increase your chances of getting approved.
Improving Your Financial Profile
Improving your financial profile to secure a bank loan can be a long process. To look attractive as a borrower, you will need to improve your credit score by lowering your debt-to-credit ratio.
Conventional wisdom on the subject is that your debt should be no more than 30 percent of your credit limit.
Other things you can do is save up money for a larger down payment or find a co-signer or another investor to partner with on your fixer.
These are a few tips that can help you get approved through an traditional lender. But this process takes time, and time is something many investors are short on when attempting to acquire financing.
Find a Great Deal
The best course of action in securing fix and flip loans for beginners is by finding a “great deal.” If you can find and secure a deal that has a great After Repair Value (ARV) and shows a profit after renovations, it’s much easier to secure funding.
Private money lenders want to see numbers that equal a profit for the borrower. When a great deal is involved, the lender knows that there is a higher certainty that the borrower will pay off the loan.
Source a property that has great earning potential, calculate your ARV and the Maximum Allowable Offer and get the property under contract. From here you will “attract” funding as lenders want to put their money to work. An attractive deal is what brings them in.
“If the Deal Isn’t Good for the Other Party, It isn’t Good for You”
-B. C. Forbes, Founder of Forbes Magazine
Hard Money Lenders Look at the Deal
Hard money (also known as equity-based) lenders look more at the asset being purchased than the borrower.
These lenders are usually more willing to work with new investors and those with lower credit scores.
Hard money lenders will want to know things like how much the property is worth, what the repairs will cost, and when you plan to sell the property.
But there are other things that private money lenders might look at for fix and flip loans. Some of these include:
- The borrowers experience in real estate investing.
- How many deals they have done before.
- What is the borrower’s level of experience? For example, are they weekend warriors working a regular 9-to-5 during the week?
- Rehab experience.
- How much of their own cash are they bringing to the deal?
Find Your Lender
Remember that each lender is different, so it is important to shop around. Fix and flip loans are a great way for beginners get started in real estate investing, because they allow you to buy property without putting up a huge down payment.
To understand more, you can learn about questions to ask a private money lender.
Take Your Shot
If you’re interested in learning more about fix and flip loans for beginners, we can help! Our team of loan analysts are ready and waiting to partner with you in this exciting journey. We know that investing is both thrilling and scary at the same time. Successful real estate entrepreneurs know they need the following to be successful:
- Risk tolerance;
- A strong desire for success; and
- Reliable partnerships;
Give Cogo Capital a call at (800) 473-6051 with your questions or start our easy loan application process today. Your success is waiting!
As Cogo Capital’s Product & Brand Manager, Charlie brings extensive experience and a broad perspective on digital marketing to the marketing team. Working with department managers, Charlie’s mission as brand manager is to elevate the visibility of the Cogo Capital brand through content development, digital advertising, and SEO to generate traffic and leads for their sales teams.