Fix And Flip Loans For Beginners: Your Guide To House Flip Financing

Fix and flip loans can be critical for house flippers seeking startup capital. Whether you’re looking to make some money on the side or you want to start a full-fledged house flipping business, you don’t need a loaded bank account to get started. There are multiple loan options available to you, whether you’re new to property flipping or an experienced real estate investor.

According to Fortune, the typical gross profit generated by a house flip in 2021 was $65,000. While this represents a slight decrease from 2020, there’s a lot of money to be made in flipping houses. And with home prices continuing to rise despite rising mortgage rates (CNBC reports that home prices rose 20.6% between March 2021 and March 2022), there remains a lot of profit potential in house flipping.

Below, we examine the best business loan types for house flipping. You’ll learn how to qualify for these loans, why they’re a good fit for house flipping, and the potential drawbacks before you sign your loan paperwork. Afterward, if you’re still looking for more financing options, check out our article on the best small business loans and our post on the best same-day cash advance funding. We also recommend checking out our step-by-step guide to starting a house flipping business.

6 Loan Types For Fix And Flip Businesses

The best business loan types for house flipping include hard money loans, home equity loans, LOCs, mortgages, and more. Get an overview of each, including key takeaways for house flippers, below.

Hard Money Loans

Contrary to what the name suggests, a hard money loan isn’t hard to get at all. In fact, it’s one of the easiest kinds of fix and flip financing to secure for purchasing investment properties. However, as we’ll explain, that convenience comes at a price.

A hard money loan is private funding obtained from investors or individuals. Unlike financing with a bank or other traditional lender, your credit score and income aren’t necessarily used as a basis for qualifying. Instead, a hard money loan is secured with an asset. With a house flipping business, the property you’re fixing would serve as your collateral and could be seized if you don’t pay your loan as agreed. Funds from hard money loans can also be received quickly — in just days or weeks compared to months with other funders — which may be necessary if you have to move fast to snap up a great deal.

Hard money loans are a good option — sometimes the only option — for borrowers with poor credit scores, low income, or other barriers that would prevent them from qualifying for traditional loans. Because the property and its potential resale value are most important to the lender, hard money loans are best for experienced flippers that have fixed and flipped at least one property. However, if you’re a new business owner, you may still qualify, particularly if you are working with a contractor to improve the property.

While qualifying for a hard money loan is easy, there are a few drawbacks. The first is that hard money loans are short-term loans. Typical repayment terms are one to five years. As with other forms of short-term funding, hard money loans also have high-interest rates compared to more traditional types of financing, typically in the double digits. The goal, then, is to purchase the property, renovate, and sell it as quickly as possible.

Home Equity Loans & HELOCs

With a home equity loan or home equity line of credit (HELOC), you can also use your own assets — your personal residence — to fund your fix and flip venture. If you have equity in your home and meet other requirements, you may qualify. Here’s how it works.

As you pay down the mortgage on your home, you build up equity. In other words, equity is the difference between the value of the home and what you owe on your mortgage. Rising property values may also contribute to equity. For example, if your home is appraised at $500,000 and you owe $200,000 on your mortgage, there is $300,000 of equity in your home. This equity can be used to secure a home equity loan or line of credit that can be used for any purpose, including purchasing an investment property.

A home equity loan, which is also known as a second mortgage, provides you with a lump sum that is repaid over a long period. A HELOC allows you to draw from a set line of credit multiple times until you enter the repayment period. A home equity loan is the better choice if you know how much money you need to purchase and fix your property, while a HELOC is the best option if you need more flexibility with your funding.

To qualify for a home equity loan or HELOC, a bank or other lender will look at the amount of equity in your home. The lender then uses a loan-to-value ratio to determine how much you can borrow. In addition to owning a home with equity, qualifying borrowers must have a low debt-to-income ratio and a solid personal credit score. No prior house flipping experience is needed to qualify.

Home equity loans and HELOCs have low-interest rates and long repayment terms, making it more affordable for borrowers to get the funds they need. The downside, however, is that approval and funding of the loan may take a long time, so it’s not ideal for deals that will move quickly. You also put your personal home at risk if you default on payments.

Business Lines Of Credit

If you like the idea of a flexible line of credit but would rather not put your home on the line, you could fund your business activities with a business line of credit. With a business line of credit, you’ll be approved for a set credit limit. You will be able to make multiple draws against this line of credit up to this limit. If you have a revolving line of credit, you’ll continuously be able to access funds as you pay down your balance.

If the line of credit is unsecured, you won’t have to put up specific collateral, although the lender may put a UCC blanket lien against your business assets or require you to sign a personal guarantee.

A business line of credit is great for fix and flip financing because of the flexibility offered. If, for example, a renovation goes over budget, you can access additional funds, provided you haven’t already hit your credit limit.

Lenders use information about your business to determine if you qualify for a line of credit, as well as your credit limit. At a minimum, lenders will evaluate your time in business and revenue for at least the last three months. Other lenders may have annual revenue, personal credit, and business credit requirements. Since you will need to show some business revenue and at least a few months of operations, this isn’t ideal for brand new businesses or businesses that haven’t yet made any money.

There are a number of reasons why you should consider applying for a business line of credit for your fix and flip business. There are few restrictions on how most lines of credit are used, so you can put funds toward purchasing and renovating a property. Also, many lenders don’t take personal or business credit history into account, so this could be a funding option for anyone with a low personal credit score or a lack of business credit.

Like all other forms of funding, lines of credit have their drawbacks. To receive the best rates and terms, there are higher borrower qualifications that you might not meet. Lines of credit with minimal requirements may have high-interest rates, shorter repayment terms, and additional fees. You might also find yourself limited by your assigned credit limit and unable to fund your renovation fully.

Rollovers As Business Startups

If you want an alternative to traditional funding, you may be able to put your 401(k) or another retirement plan to work for you through a rollover as a business startup (ROBS). Typically, early withdrawal of your retirement funds means that you’ll have to pay taxes and other penalties. However, a ROBS allows you to bypass these penalties and use your retirement funds for your business.

Here’s how it works. A new C-corporation is set up, along with a new retirement plan. Funds from your existing plan are rolled over into the new plan. Funds are now used to purchase stock in the new C-corp. Then, the proceeds from the sale of stock can be used for any business purpose, including funding your fix and flip business.

One of the biggest benefits of a ROBS plan is that you are not borrowing from a lender, so you don’t have to worry about interest rates, closing costs, and other fees. However, many people opt to have their ROBS plan set up and managed by a ROBS provider, which requires a setup fee and monthly maintenance costs. A ROBS provider can get everything set up legally while also ensuring you maintain compliance.

With a ROBS plan, you don’t have to worry about income, time in business, personal credit history, and a business credit profile. Of course, you do have to worry about one major drawback: potentially losing your retirement funds if your fix and flip business fails.

Personal Loans

Qualifying for business loans is challenging — if not impossible — for new businesses. That’s because newly launched businesses are unable to meet business credit profile and annual revenue requirements. However, if you don’t qualify for a business loan, you may be able to use your personal information to qualify for a personal loan for business.

A personal loan is taken out in your name, not the name of your business, so your business experience (or lack thereof) isn’t a factor for approval. You’ll use your income and your personal credit profile to qualify. Once approved, you’ll receive a lump sum that can be used for business expenses. You can take multiple avenues to receive a personal loan for business, from your bank or credit union to online lenders.

Personal loans can have very favorable rates and terms, resulting in a lower overall cost of borrowing. The best rates are reserved for borrowers with low debt-to-income ratios and a solid credit history. If you have personal credit challenges, you may qualify with some alternative lenders. However, with these lenders, you may have higher interest rates, shorter repayment terms, or be required to put up collateral to secure the loan.

Traditional Mortgage

If you’re more experienced in flipping houses, you may qualify for a traditional loan or mortgage from a bank, credit union, or other financial institution. These work just like your primary home mortgage: The lender gives you money, you make the purchase, then you repay the loan over a longer amount of time — typically 15 to 30 years.

The good news with these loans is that interest rates are very low. However, qualifying can be difficult. To qualify for a mortgage, you’ll have to show previous experience in flipping houses, meet credit guidelines, and fulfill other requirements. Not all lenders will offer loans or mortgages for properties that the owner doesn’t occupy. Others won’t lend on homes that are in extreme disrepair. Because of its long repayment terms, going the traditional route is often a good idea if you plan to fix up a property and rent it out (or “buy and hold,” as it is known in the industry) instead of immediately selling once renovations are complete.

How To Improve Your Chances Of Being Approved For A Fix & Flip Loan

While there’s no guarantee that you’ll get approved for a loan for your fix and flip business, you can take a few steps to improve your odds. The lending process can also be lengthy, especially if you don’t understand the application process. Know what to expect and be prepared by taking the following steps.

Have A House Flipping Business Plan

Lenders want to work with low-risk businesses with a high likelihood of success. You want to show your lender that you are serious about your house flipping business and that each property is worth the investment. Your business plan should include information about your business, such as your industry experience, your objectives, and a financial summary. Learn more about writing your business plan.

Each time you plan to rehab a property, you should include an analysis of that property in your business plan. We’ll discuss what data you should include in this analysis in just a minute. Analyzing each property is critical for getting the right amount of money from your lender.

Have A Fix & Flip Property In Mind & A Plan Of Action

To be able to analyze a property and present this information to a lender in your business plan, you must first have a property in mind. Once you’ve found a property, you need to create a plan of action, from what contractors you’re going to use to how much the property will be worth once it’s rehabbed. This not only gives you a better understanding of the costs and timeline of your renovation but this plan of action should also be included in your business plan.

What should your plan include? At a minimum, address the following points:

• • • • • • • Sale prices of comparable homes
            • Neighborhood analysis
            • Financial projections for the renovation
            • Timeline from acquisition to flipping the property
            • Information about who will be involved in the rehab, such as business partners and contractors
            • Appraisal of the property in its current state
            • The estimated value of the property post-renovations

If you’re new to fixing and flipping homes, we recommend working with someone familiar with the industry. This could mean taking on an experienced business partner, working with contractors that specialize in renovations, or talking to real estate investors. These individuals can share their expertise, which can help you better understand the business and create an effective and realistic plan of action.

Understand The Costs Of Flipping A House

When it comes to flipping houses, one area that commonly trips up newbies is estimating the costs of acquiring and renovating a home. It is very easy to underestimate the costs of fixing and flipping a home. If this occurs, you risk not borrowing enough money from your lender, which could significantly delay your project.

Experienced flippers know that creating a detailed scope of work is imperative to understand the costs associated with flipping a property fully. You can work with a contractor and an appraiser to get a more accurate picture of costs.

Some costs to consider include but are not limited to:

• • • • • • • Down payment
            • Purchase price of the property
            • Closing costs
            • Building materials
            • Appliances
            • Labor (electricians, plumbers, landscapers, painters, and general contractors)
            • Permits

The cost of your renovation will vary widely based on the amount of work that needs to be done. For example, a home that only needs a few cosmetic fixes (upgraded countertops, paint, or new flooring) may have very few associated costs to get it ready for the next buyer. On the other hand, a home that needs structural work, a new roof or HVAC unit, or an additional room may have significantly higher costs.

In addition to the cost of buying and renovating the property, you have to consider other expenses, such as property taxes, property insurance, real estate agent fees, and marketing costs to sell the property.

Even with careful planning, expect the unexpected. Unforeseen issues can arise during the renovation process, increasing your costs and adding to your timeline. However, the more details you include in your scope of work, the more accurate your calculations will be.

Improve Your Credit

Most people don’t have a perfect credit score, so there’s always room for improvement. Cleaning up your credit and taking steps to boost your score increases your chance for approval and opens up more funding options, and helps you qualify for the best rates and terms.

While there is no overnight fix for raising your credit score, there are some steps you can take that can boost your score by several points or more over a few weeks or months. This includes accessing your free credit score, disputing any errors on your report, paying down (or paying off) debts, and keeping your balances low. Always make your minimum payments on time (and pay more, if you can) to lower debt and help increase your score. Learn more about how you can raise your credit score before applying for a loan.

Think Outside The Box

Sometimes, even the most carefully laid funding plans fall through. It happens to even the most experienced entrepreneurs. The key is not to let it slow you down and think outside the box. Consider other financing options if you’re having trouble securing funding through traditional lenders or face high-interest rates and less-than-stellar terms. This could include using a real estate crowdfunding platform, taking on a business partner with capital to invest, or tapping a friend or family member for a loan.

Which Fix & Flip Loan Type Is Right For Your Business?

Operating a fix and flip business isn’t like what you see on those house-flipping reality TV shows. It takes time, hard work, and capital to flip houses. However, when you find the right funding for your situation, flipping houses can be a very lucrative and rewarding venture. As with any type of loan, make sure you do your research, understand the challenges ahead of you, and make the best decision based on your business goals. Good luck!

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