How To Fund a Fix and Flip Project
One of the easiest ways to get into real estate investments is through fix and flip projects. These investments entail purchasing a property, making needed repairs and then selling it for a profit. If you are not independently wealthy, however, then you need a way to fund these projects and serious investors can have a lengthy portfolio before the next project is completely funded without financing.
Rehab loans, renovation loans and flipping loans are similar with the biggest difference being the marketing behind them and the naming preference of the lender. It is more common to call a mortgage for a historical property a rehab loan than the others, for instance. This source of funding is meant for purchasing real estate and funding renovations, so you may need a scope of work for the project and a business plan to submit with your application. You will also need to tell the lender whether you intend to sell the property, rent it out or use it yourself.
Loans specific to fix and flip projects do exist and can differ from rehab loans for properties you are intending to rent out or keep for personal use in that they usually have ballooning payments at the end of the term and rarely have prepayment penalties. This is because the lender expects you to have the project finished and sold in the timeline you have given them so you can repay the loan after the sale. Not all flipping mortgages are designed this way, however, so it is important to talk to the lender about prepayment penalties, balloon payments and interest rates as you shop around for a loan.
Traditional mortgages are not the preferred option for fixing and flipping properties because they are usually fixed to a purchase amount and not approved for the fix or renovation costs on top of that amount. These mortgages are also set up to be longer term than your flip schedule. If you are just starting out, and want to reside in the home as you renovate it, then a traditional mortgage can be easier to qualify for and does not usually require a detailed scope of work or other business paperwork.
Getting into the fix and flip market can be a good way to start building your investment portfolio, but it is an expensive endeavor which will usually require financing. Knowing the differences between rehab, flipping or traditional home loans can help you choose the right funding for your project, whether you plan on rehabilitating a historical property to live in, want to flip a house for profit or are getting into the landlord business.