Updated: Sep 17
Flipping property is a popular investment option for both individuals and institutional investors. Fix-and-flip loans help bridge the gap between the buyer’s capital and the property’s purchase price and renovation costs. These loans are short-term in nature and are typically repaid with proceeds from the property sale. But this is just the beginning. Let’s take a look at what fix-and-flip loans are and how to start financing a real estate flip.
What are Fix and Flip Loans?
Fix-and-flip loans are short-term loans used by real estate investors to purchase and improve a property to then sell for a profit. These improvements range from minor renovations to a complete reconstruction of an existing home. Fix-and-flip loans are used exclusively for residential real estate investments, so renovating a school, for instance, would not qualify for this type of funding.
In a fix-and-flip project, the property is often purchased at auction, through a foreclosure or a bank short sale. A buyer may later try to sell the property “as-is” or may choose to add value by improving on the property before selling it. This is where fix-and-flip loans come in. When a buyer decides to upgrade and resell the property for profit, fix-and-flip loans are typically used to cover the upfront costs of renovating the property.
What you can do with a fix-and-flip loan
There are several different fix-and-flip projects. Oftentimes, fix-and-flip investment offerings are diversified and can include the following:
Purchase: A borrower has the opportunity to purchase a property from a distressed seller at a deep discount and put it back on the market with some minor renovations.
Renovation: A borrower has the opportunity to purchase an old single-family house, for example, and renovate it to make it more appealing before quickly putting it on the market to sell. Renovations can include installing new kitchen cabinetry, replacing floor tiles, putting in hardwood floors, painting the house inside and out, and furnishing it with new appliances.
Construction: A borrower has the opportunity to purchase vacant land with a dilapidated single-family house on it, demolish it and replace it with a 2-unit residential house, with the intent to sell it.
Advantages of fix-and-flip loans
The demand for fix-and-flip loans generally stems from capital inefficiencies in the current lending marketplace. These relatively short-term loans create opportunities for investments that potentially provide attractive yields for investors. In addition to this, fix-and-flip loans have other benefits:
Secured Investment: The real estate serves as collateral, whether that is the property or land involved in the offering. In case of a default, the lender could take ownership of the collateral.
Short Duration: Fix-and-flip offerings are short in duration–typically 12-24 months–and there is no penalty for repaying the loan early.
Diversification: Fix-and-flip offerings have low stock market correlation, making them potentially good options for diversifying traditional portfolios.
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