Fix and Flip Financing Options
Fix and Flip... Are you dreaming of purchasing a distressed property, fix it up and sell it for a profit, but funding is a major impediment?
Flipping houses is not always as exciting as it might look. However, it can be a good way to bring in a stream of investment income. To get started, you’ll need some cash to purchase the distressed property In addition to the down payment and the renovation costs, you will also have to pay the holding costs of owning a home until you sell. These include property taxes, homeowner’s insurance, etc. After completing the renovation and selling the house you will also have to pay recording fees, title search fees, escrow fees etc. The average return on investment house flippers saw last year was 49.8%.
Traditional Bank Financing
The first place you should consider for a loan is your local bank. Getting a fix and flip loan from a bank is going to be just like getting any other type of mortgage loan.
Most banks sell both conventional mortgages and government-backed mortgages; both types bring different advantages and downsides for an investor when purchasing buy and hold or short-term house flipper.
Traditional bank loans are not backed by the government, the entire risk factor for the loan remains with the borrower. Taking out an FHA or VA loan is very different from taking out a conventional loan on real estate. With an FHA or VA loan, you must live in the property in order to use that financing. So in order to use an FHA or VA loan to purchase an investment, you can buy a two-four family house to live in one unit and rent the others. This is probably the best way to get into your first real estate investment. Check with your mortgage broker which one would be more suitable for your situation.
Home Equity Loan or Line of Credit
In case you have built equity in your home, you may consider tapping into that to fund your house flip and getting a second mortgage. This loan has to be repaid over a fixed term and usually with a fixed interest rate. The biggest disadvantage when using home equity to pay for your house flipping project is that your house will serve as the collateral. Your house is at stake if you fall behind on the home equity loan or line of credit payments. In this case, the bank could decide to foreclose on your primary home.
Hard Money Loan
Hard money lenders make loans for flippers and real estate developers on slightly different terms than banks. This can also work for a fix and flip situation. These loans are designed for borrowers that have been turned down for traditional financing as a result of poor credit scores. The biggest benefit of a hard money loan is that collateral for this type of loan comes from the property itself. However, it is important to be aware of the disadvantages of hard money loans, as well. Hard money loans have extremely short-term repayment periods; they usually have a balloon payment within a year to three years or so. Another drawback is that hard money loan rates run anywhere from 10-12 percent. The closing costs are higher for a hard money loan as well. The upfront points will run anywhere from 4-6.
Real Estate Crowdfunding
Real estate crowdfunding
, is a brand-new industry that just started in 2013 due to the JOBS Act of 2012. Crowdfunding is another viable option for investing in real estate. Just like with all other options it has its benefits and drawbacks that you should address & assess before making your decision.
In this case, the process is much faster and more efficient than traditional financing. As everything is done online there a few online platforms that promise loan approval within 24 hours. Loans are generally for 1-36 month terms at 8-14 % interest. The crowdfunding platform will have a fee structure that has to be factored in when analyzing an investment’s viability. Each site usually charges an origination fee that it retains for itself.
Some of the major cons besides the higher costs are the poor customer service and guidance. Although most crowdfunding platforms offer assistance and support, they do not offer the level you would receive if you were working with a mortgage broker or a bank.
If you want to dabble in the real estate investing business but you don’t have deep pockets you can choose one of the above-mentioned financing options to make your dreams a reality.