As a real estate investor, you know how quickly the market can move. When you identify an opportunity for a property that just needs a little touch up work and doesn’t need any additional space, you know you’ve potentially found a gem. You have to act fast, negotiate a low purchase price, and get the best deal from the seller. To do this, you need cash.
Unfortunately, traditional bank loans are not always an option. You might not be eligible for a bank loan, or the property might not meet the bank’s requirements for a loan. Even if you are eligible, traditional bank loans don’t close fast enough for you to move quickly on a fix-and-flip deal.
Knowing what types of fix-and-flip loans are available and which ones make sense for your situation is key when you need to jump on an opportunity.
1. Hard-Money Loan
Hard-money loans are generally good for investors with poor credit, experienced investors who know they can flip fast, new investors who need more money to close a deal, and those working with a contractor to flip a property. Hard-money lenders focus more on the property and less on the investor’s history, so if you find a great deal but don’t have good credit or history as an investor, this is a good loan option. One of the biggest advantages of a hard-money loan is that it offers a fast turnaround time—with approval in hours, not days—so you can jump on opportunities when they arise.
A hard-money loan can cover not just the purchase price of the property, but also the funds needed to do the refinishing, up to 85 percent of the total project cost. Depending on the type of loan you get, the terms can range from six months to two years, and there is no limit to the number of loans you can secure—so you can work on flipping multiple properties at the same time. Hard-money loans are also often viable options when bank loans are not possible.
2. Cash-Out Refinancing of Another Property
A cash-out refinance loan allows borrowers to get a new mortgage on an existing property for a higher value than the previous mortgage. The difference is paid out in cash to be used for other investment properties. In order to qualify for this type of loan, you need 40-50 percent equity in an existing property. If the property is owner-occupied, the majority of the cash must be used for investment purposes. Not everybody has this level of equity, which is why a hard-money loan could be a more suitable option, especially for newer investors. A cash-out refinance loan also requires 51 percent or more of the cash-out proceeds to be used for business purposes.
3. Home Equity Line of Credit
A home equity line of credit is available to homeowners with at least 20-30 percent equity in their property. Even if you do meet this requirement, it might be a less appealing option because it means that you have to put your personal property on the line to fund a fix-and-flip investment. If you don’t already have an open home equity line of credit, this option also takes much longer compared to hard-money loans.
4. Investment Property Line of Credit
More experienced investors with an established track record may have the option to get an investment property line of credit to finance a fix and flip. However, because it requires that the investor must already have 30-40 percent equity in rentals, this financing option is not available to everybody. Newer investors who haven’t established equity yet are not eligible, so if you are just getting started, this is not an option.
5. Bridge Loan
A bridge loan is a good choice if you plan to get another type of financing in the future. The main benefit is that you are able to close quickly on the property and get funds fast. However, if you’re unable to secure long-term financing or flip the property fast enough, a bridge loan can be expensive.
Know Your Options So You Can Act Fast
When you see an opportunity to fix and flip, you need fast access to capital. Understanding the lending options available will allow you to act fast when you need to. Hard money is a good option if you need quick access to capital and aren’t able to work with a traditional lender. Curious about whether you qualify? Do you have a scenario in mind you would like to discuss? Fill out our short form to get started.