Fix-and-Flip Loans Could Help Expand, Diversify, and Improve Your Investments
Is a fix-and-flip loan right for you? We’ll explore this complex topic so you can make an informed decision.
Buy, fix, sell. Profit.
Popular television shows make it look easy. In just a half hour, they go from purchasing a dilapidated property to earning a profit on the sale. Everyone is thrilled with the results, and the stars of the show must be making money; if they weren’t, the show probably would have ended years ago!
But fixing and flipping properties is, as virtually everyone knows, not as easy as these shows make it seem. To earn a profit on your sale, you need to buy carefully, remodel strategically, and sell profitably.
It’s not terribly complicated, but it does take diligence, hard work, and patience. In many cases, it also takes a high-quality fix-and-flip loan from a reliable mortgage agent.
Everything You Need to Know About Fix-and-Flip Loans
What are Fix-and-Flip Loans?
Fix and flip is simply the process of purchasing a property, making improvements, repairs, or renovations that enhance the value, then selling at a profit. This is an exciting, interesting, and potentially-lucrative investment strategy that can be used to diversify a property portfolio.
A fix-and-flip loan, therefore, is simply a loan that funds the purchase and repairs. They are often used by real estate investors to make a purchase and improve the property, and they are available through a variety of lenders, including some banks, credit unions, and other groups.
What Projects Can You Complete with Fix-and-Flip Loans?
Frankly, the list of specific projects you could complete with a fix-and-flip loan is too large to list in one article. From roof repairs to finishing a basement, the list is seemingly endless. Generally, a fix-and-flip loan will fund three aspects of the investment:
- Purchase: First, it provides funding for the actual purchase of a property, similar to just about every other mortgage loan. In most cases, these loans are used to purchase properties that are worn-down, neglected, or simply in need of a little care and attention. You would not use these loans to purchase a market-ready property, although the amount of work required before listing the property can vary.
- Renovations: The other use for these loans is renovations. You can not only get financing to purchase the property, you can also have funding for improvements, repairs, and remodeling. These renovations can include necessary projects, such as foundation repairs or rewiring the house, or they can include optional projects that enhance sales potential, such as kitchen and bathroom remodeling.
- Construction: Although less common, fix-and-flip loans can be used for new construction. Investors can purchase homes that need demolition and build new housing on the property,
Benefits of a Fix-and-Flip Loan
There are many advantages to using a fix-and-flip loan and adding this type of investment to your portfolio, These loans, which are generally short-term compared to other investment loans, create opportunities that could inject a windfall of cash into your accounts.
Fix-and-flip loans help you purchase a secure investment. The real estate you are purchasing serves as collateral; loans that are attached to some form of collateral, called secure loans, can come with better terms. Basically, if the lender knows they can recover the asset (in this case, the property) if the loan goes unpaid, they can offer loans with lower downpayments or credit requirements.
These loans are also a good short-term strategy. Short-term, that is, from the perspective of real estate investments. These loans usually are repaid in full within 12 to 24 months, usually after the property has been sold. There is usually no penalty for early payment (check with your lender before signing), creating a useful injection of cash after about one to two years.
Fixing a home and “flipping” it can also be a useful way to diversify your investment portfolio. If your portfolio is dominated by a single type of asset, such as commercial property or residential rentals, swings in the market can impact your cash flow. It’s often wise to diversify, which spreads risk across various asset types.
Should I Use Fix-and-Flip Loans, Even If I Can Pay Cash?
Many investors have the cash on hand to purchase a fix-and-flip property outright. They also have the financial resources to fund any repairs. So why not simply pay for the project with cash? You certainly can, and in many cases it may be the right choice; using cash can reduce longterm costs, as you don’t have to pay closing fees, interest, and other payments that come with mortgages.
However, some investors prefer to use loans, even when they have the cash on hand. They prefer to maintain liquidity in their capital, and don’t want to bind their money to a property. For this reason, even people with the cash may “leverage” fix-and-flip loans.
Fixing and Flipping: Not an Easy Investment
Before making the choice to start a fix-and-flip project, you need to seriously consider whether this is the right investment for you. This is a difficult, time-consuming, and often frustrating way to earn an income, and while it can certainly be lucrative, many promising fix-and-flips have turned into fix-and-flops.
Even if you get a great deal on your purchase, the cost of construction, remodeling, and refurbishing the house can easily chew up all of you potential profits. You need to be highly disciplined, only working on projects that will enhance the value of the home. You need to be selective with materials, study the market, analyze potential gains, and critique every last detail of your remodel.
It takes time, energy, and patience, but with the right strategy and the right loan, it could help you create a wonderful property and see an excellent return on your investment.
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If you want to learn more about fix-and-flip loans, contact our staff today. With a wide variety of loan options, we can help you find the right financing for your next purchase!