Whether you are a new or seasoned house flipper, “Fix and Flip” hard money loans are an essential tool for real estate investors to have in their tool belts.
Today we are going to take a wider look at these loans, and answer some key questions about the basics of fix and flip loans and how to understand them as a form of hard money lending.
A fix and flip loan is a hard money loan; though the terms are sometimes used interchangeably, a fix and flip loan is specifically used for short term rehabs on real estate investment properties where a rehabber buys a property to fix up and sell for a profit.
There are a lot of things to know about hard money loans:
- why to use them,
- how to get them,
- and how they differ from other financing options.
Table of Contents
- How Hard Money Loans Work
- Why Hard Money Loans Are Ideal For Fix And Flip
- Basis Of A Fix And Flip Hard Money Loan
- How To Get A Hard Money Loan For A Flip
- Hard Money Lending Process
- How Much Money Do You Need Out Of Pocket
- Can Yo Really Flip Houses With No Money
But first, how do hard money loans work?
A hard money loan is for rehabbing properties for rental or commercial use, as opposed to the flipper’s personal residence. Hard money loans are issued from private companies, such as FasterFunds Lending, rather than banks or mortgage brokers. Unlike other sorts of loans, a hard money loan is given on a short-term basis of up to six months. This is ideal for the fast nature of fix and flip rehab projects.
Why Hard Money Loans are Ideal for Fix and Flips
Hard money is a particularly good tool for scaling your investment properties- in other words, taking on projects incrementally, with strategic loans that allow you to rehab with little money down. We recommend hard money loans for fix and flips because they minimize the amount of money a flipper has to personally sink into a property.
There are certainly a lot of costs involved in flipping a property for the resale market: borrowers have to consider the purchase price of the property, what the renovation costs will be, and plan for emergencies.
A hard money loan—sometimes referred to in this context as a fix and flip loan—can empower a new flipper working on one flip, or bolster a seasoned rehabber working on a few simultaneously. Hard money loans can be used for various property investment projects, but today we are talking about one in particular: a fix and flip project, financed with a hard money loan.
So, what exactly is a fix and flip?
A fix and flip is a short term wealth building strategy where a borrower is specifically looking to purchase a discounted property to renovate before selling at a profit. A borrower is usually in and out of a fix and flip rehab within six months. To finance this sort of real estate project, a fix and flip hard money loan can be a great option for scaling your real estate investment portfolio without putting 20 percent down each time.
Key factors in a fix and flip loan are closing time, property value, and the borrower’s financial plan. Fix and Flip hard money loans allow investors to close fast regardless of the property’s condition.
For borrowers, this means there is a great potential to profit on a well-executed property enhancement plan. However, to some money lenders, like banks or mortgage brokers, fix and flip projects can feel too risky to lend on, or their loan conditions leave little room for the flipper to profit. Rehabbers and flippers interested in these projects need to find a lending source that sets them up for success.
Understanding the Basis of a Fix and Flip Hard Money Loan
Two features in particular stand out as important basics to know about hard money loans for flipping houses:
- the time it takes to close on a loan,
- what costs the loan actually covers
Hard money loans have a faster closing period than loans from the bank. Among hard money lenders in the St. Louis area, FasterFunds Lending is notable for its extremely efficient closing period of 3-5 business days.
Closing times from alternate sources could take from 30 days up to half a year. Since fix and flip property rehabs are typically only short-term projects, the closing turnaround time can be a critical factor in the success of the project.
For fix and flip rehabs, hard money lenders will typically offer a loan covering 100% of the property’s purchase price as long as you are 70-75% of the after repaired value minus repairs. Then, many will loan additional money towards the cost of renovation.
The size of the loan earmarked for rehabbing will vary slightly depending on loan type and lender, and we will cover that later. In general, this additional loan value is based upon ARV, or after repair value—aka, the most likely future value of the property, rather than its value at the time it is purchased for flipping.
Qualifying hard money borrowers in the St. Louis area can receive up to 75% of the ARV. If a property’s purchase price is very high, that can affect how much loan is available towards the rehab itself.
A hard money loan for flipping is ideal for local rehabbers because we offer a slightly higher loan amount than other hard money lenders, who usually cap ARV based loans around 70%. Our ARV basis is ideal for local house flippers because the extra wiggle room guarantees borrowers do not have to be “rich” to start investing in St. Louis real estate.
FasterFunds Lending believes 75% of the ARV is the sweet spot for a total loan amount. At any higher percent of the ARV, the loan can border on being financially unsustainable in the face of an emergency, though there are safeguards for higher value loans that we will touch on in a minute.
We would be excited to see you proposing a loan closer to or below 75% of your ARV. This value range makes the loan more stable, and allows the borrower lots of potential equity because you have more room to make a profitable deal upon listing your finished fix and flip on the resale market.
Before purchasing a fix and flip property, be sure you set your own financial expectations for the loan, and collaborate with your hard money lender to ensure they are realistic for all parties involved.
Hard money is a powerful tool for property investors. However, with power comes responsibility! A hard money loan doesn’t necessarily guarantee a large profit margin, or in a worst-case scenario, any profit.
Yet it does guarantee a second set of eyes on your financial status and rehabbing plans, which can be a major factor in your success. FasterFunds Lending has a whole process of collaboratively fact checking your finances so that loans are as safe as possible for borrowers, even in the face of uncertain housing markets, contracting plans, and the like.
At FasterFunds, we have established a careful yet distinctly efficient process for working through borrower loan requests.
How can I get a hard money loan for a flip?
The process for getting a hard money loan is different than getting residential or commercial loans. This process will also feel a little different if a borrower is used to getting loans from a local commercial banker division or mortgage broker.
Each of these other sources will have varied applications processes. Your best bet for getting a fix and flip loan in the St. Louis area is to scroll to the top of the FasterFunds Lending website and click “apply now”!
We offer a variety of resources on our site to prepare you for this process as well. The FasterFunds Lending application process sets us apart from our local area competition: everything can be completed electronically and sets our borrowers up for success.
Hard Money Lending Process
Step 1 – Borrower Pre-Approval
The first step to getting a hard money loan for a flip is to get pre-approved and go through our borrower underwriting process. To apply, fill out the application on our website and submit the additional required materials.
At FasterFunds, we provide borrower underwriting to ensure you receive the loan that is right for you. By consulting with you over the additional required materials—a credit check, background check, bank statements, and tax returns—we will be able to facilitate a win-win situation that allows you to have the best loan for your project, while still being financially feasible if your project hits unexpected snags.
Some hard money lenders only consider the value of the property itself when handing out loans and do not provide borrower underwriting services. This is a huge disadvantage to you, the borrower!
Typically, these hard money lenders have riskier loans, and therefore they foreclose on more loans, hurting their borrowers in the long run. This also increases costs due to legal and administrative fees which then get passed on to their borrowers or clients.
FasterFunds Lending wants to consider the borrower’s level of experience with the level of project difficulty they are taking out a loan for.
For example, we will talk with you about your experience in previous rehab projects, if you have contracting experience, or what sort of skilled trades you are trained in, among other things.
At FasterFunds Lending, we collect all our potential client’s information so we can have the right tools in place for our borrowers to make profit on a flip. Talking to team members with questions, concerns and criteria in advance helps you with application process and helps FasterFunds Lending provide you with the best advice.
Step 2 – Qualifying the Property
The next step to getting a hard money loan for a flip is getting the property approved, in a process called property underwriting.
Most lenders, whether they are a commercial, residential, or hard money lenders, are going to require an appraisal on the property before they issue your loan. With most loan providers, that appraisal can cost in the range of $400 – $600. This fee can be a setback in the financial game plan of your rehab.
FasterFunds Lending offers a unique service where one of our expert team members will provide the appraisal at no charge.
Our team is made up of St Louis real estate experts who actively own rental portfolios and flip houses. They are active in real estate and understand your business needs.
In our property underwriting, we also invite the borrower to be present for this appraisal. By walking through your proposed fix and flip property together we can help you make sure that your numbers, rehab game plan and scope of your project make sense, and help you realistically understand what the outcome of the project will be.
This is another way we help ensure a win-win situation. Our team members have direct experience rehabbing their own houses and will be advocates to your success.
How much money do you need to start flipping houses out of pocket?
Ultimately, the lower the purchase and rehab costs are, the more stable your loan situation will be. Borrowers need to have a good financing strategy when taking out a loan for a fix and flip.
When using a hard money loan, you might not need as much liquid capital (cash) up front, because you won’t have to put money down. However, you should absolutely still have emergency funds incase surprises come up at your project. Meaning, you need a safety net.
It is recommended that every borrower should, at minimum, be prepared to comfortably make interest payments over the full 6-month period and have a savings buffer in case rehab goes over budget.
Say there is a sudden downturn in the resale listing market, holding costs are higher because of market shifts, or the original budget failed to consider a massive expense such as replacing all the windows. The emergency money could be in checking, savings, a home equity line of credit (HELOC), or commercial line of credit.
Our borrower underwriting will help prepare you for these financial emergencies during a fix and flip, whereas a brokerage or bank will not be personally interested in your financial solvency. You either qualify for their products parameters or you don’t.
For more advanced real estate investing financial techniques utilizing hard money loans, and additional sources of financing, more information can be found in this article – Leveraging Multiple Financing Techniques.
Can you really flip houses with no money?
So, with a safety net in mind and remembering our loan percentage example from above, it is technically possible to flip houses with none of your personal cash invested, but a good lender wants to see you succeed.
At FasterFunds Lending, borrower underwriters will encourage you to identify a truly great property deal and still have access to emergency funds if something goes sideways on you. With an emergency reserve buffer, the flip is still a “no money” situation, because the lender is providing both fix up costs and purchase funds but it is stable enough to be a win-win, even in the face of unexpected events.
Here at FasterFunds Lending, we want to see our people succeed in their fix and flips! Our mission is to set you up for a successful flipping venture and have your financial safety in mind every step of the way! If you would like to get started with a fix and flip loan just apply here or give our team a call at (636) 223-4262
- St Louis Real Estate Investor with 5 years of personal investing experience
- Completed 7 Flips while acting as the general contractor
- Grew up in a real estate investing family and experienced first-hand the power of flipping, cashflow and the BRRRR method
- Owns a rental portfolio of 3 rentals, specializing in St Charles county
- Experienced wholesaler
- Works for FasterFunds Lending, a hard money lender in St Louis, MO
- Walked over 400 houses with real estate investors in order to help them fund their real estate deals