Top 4 Things to Know About Fix and Flip Funding

About a third of rehab investors turn to fix and flip loans to help fund their projects. With fix and flip funding, you can do more with your capital, taking on multiple projects at once or investing in bigger projects with better overall returns. Taking out a loan also helps you mitigate your risks so that you don’t have to put your whole life savings into a single investment.

But how do you get started with fix and flip funding? What pitfalls should be avoided? Here are four key things to know about fix and flip funding to help you get started.

1. Hard money and private money are not the same thing.

These terms sometimes get used interchangeably, but they shouldn’t. If a company describes their loans as “hard money,” chances are that the company is a broker, not an actual lender. Brokers don’t have any skin in the game – they simply make money by arranging loans, and their middleman services make your loan more expensive. A hard money loan might be easier to get, but it’s also likely to come with more risks.

Private money loans are offered by licensed companies or individuals who control the funds being offered themselves. With a true private money loan, the funding should be guaranteed if you’re approved and the lender should underwrite their own loan, which means they have the power to offer better terms to more experienced investors, if they wish.

Again, sometimes the “private” and “hard money” terms get thrown around, so make sure to read any terms carefully.

2. Fix and flip loans have costs that can vary widely.

Some lenders are rather tricky at hiding their loan fees. They might roll fees into the loan to make it less clear just how much you’re paying for the loan. The might also charge a high number of loan “points,” which sounds like you’re on your way to winning a prize, but you’re not. Each loan point is one percent of the loan, and that money is coming out of your pocket.

As with any loan, read all the terms carefully and shop around. It’s never in your best interest to settle for the first offer you get.

3. You should get pre-approved before you’re ready to buy.

Some first-time house flippers make the crucial mistake of finding the property they want to flip and then looking for a lending company. By the time they get a loan, that property is long gone. Determine how much you want to invest, get pre-approval, and then use your letter of pre-approval as leverage in any bidding wars so that you can come out on top.

4. Expect to invest your own money.

If you’re thinking that you can get started as a house flipper with no capital of your own, you are mistaken. Any reputable lender will require that at least part of the purchase price is covered by you with cash. Of course, many people get their start with a loan from parents or business partners.

However you get your start, just remember that flipping houses is a real business that requires a great deal of preparation and hard work. If you’re looking at house flipping as a gamble, you should choose another business.