Fix and Flip Loans: Complete Financing Guide for House Flippers
Fix and flip loans are short-term financing products specifically designed for real estate investors who purchase distressed properties, renovate them, and resell them for profit. Unlike traditional mortgages meant for long-term ownership, fix and flip loans provide fast funding for both the property purchase and renovation costs, with terms typically lasting 6-18 months.
These loans are structured around the property's after-repair value (ARV)—what the property will be worth after renovations are complete—rather than its current distressed condition. This allows investors to borrow money based on the property's future value, covering both acquisition and renovation expenses in a single loan package.
What is a Hard Money Loan?
In the world of house flipping, "hard money" is the most common form of financing. A Hard Money Loan is an asset-based loan provided by private lenders rather than banks.
"Asset-based" means the lender cares more about the property's potential (the deal) than your personal credit score or tax returns.
Key Differences vs. Traditional Bank Loans:
- Speed: Hard money can fund in 7-10 days, whereas banks take 30-45 days.
- Requirements: No tax returns or DTI ratios needed.
- Condition: Banks won't lend on "uninhabitable" properties (e.g., missing kitchen, hole in roof). Hard money lenders specialize in them.
- Cost: Hard money has higher rates (10-15%) but is only held for a few months.
Calculating the Numbers
Typical Structure:
- Term: 6-18 months (12 months most common)
- Funding: Purchase price + renovation budget
- Payments: Interest-only monthly payments
- Exit: Property sale pays off loan (balloon payment)
- LTV: 85-90% of purchase price, 65-75% of ARV
Example: Imagine you find a distressed property for $150,000 that needs $50,000 in repairs. You estimate the After-Repair Value (ARV) will be $285,000.
- Loan Amount (85% of Purchase + 100% of Reno): $127,500 + $50,000 = $177,500
- Your Down Payment (15%): $22,500
- Projected Profit: $285,000 (Sale) - $177,500 (Loan Repayment) - $22,500 (Initial Investment) - $20,000 (Holding/Closing Costs) = $65,000
Want to run your own numbers? Try our Real Estate Calculators.
Exit Strategies: Getting Out of the Hard Money Loan
Hard money is expensive, so having a clear exit strategy before you borrow is critical. There are two main ways to pay off the loan and secure your profit.
1. The "Flip" (Selling)
This is the classic exit. You renovate the house, list it on the MLS, and sell it to a retail buyer.
- Pros: Large lump sum cash profit. Clean break from the property.
- Cons: Short-term capital gains tax (if held less than 1 year). Selling costs (agent commissions, closing costs).
- Best For: Investors needing cash to fund the next deal.
2. The BRRRR Strategy (Refinancing)
Buy, Rehab, Rent, Refinance, Repeat. Instead of selling, you keep the property as a long-term rental.
- The Process: You use hard money to buy and fix the house. Once it's rented out, you refinance into a long-term, low-interest loan (like a DSCR loan) to pay off the expensive hard money loan.
- The "Cash Out" Bonus: If your ARV is high enough, you can often "cash out" refinance, getting back your original down payment to use on the next property.
- Best For: Building long-term wealth and monthly cash flow.
3. DSCR Refinance
When holding the property (BRRRR), you usually won't use a conventional bank loan to refinance because they require personal income verification. Instead, investors use a DSCR (Debt Service Coverage Ratio) Loan.
- Qualify with Rent: The new loan is approved because the tenant's rent covers the mortgage.
- No Tax Returns: Ideal for self-employed investors.
- 30-Year Fixed Rates: Locks in your rate for the long haul, replacing the short-term hard money rate.
Pros and Cons of Fix and Flip Loans
| Pros | Cons |
|---|---|
| Speed: Funding in as little as 7-10 days, allowing you to compete with cash buyers. | Cost: Higher interest rates and origination fees than conventional mortgages. |
| Renovation Funding: Covers construction costs, keeping your cash liquid. | Short Term: Must sell or refinance quickly (payment shock if held too long). |
| Qualification: Based primarily on the deal's profitability, not just your personal income. | Experience Required: Some lenders prefer borrowers with a track record. |
How to Qualify
While less stringent than banks, private lenders still look for:
- Experience: Have you successfully flipped houses before? (New investors may get lower leverage/higher rates).
- Property Deal: Does the math make sense? Is the ARV realistic?
- Strategy: Do you have a clear plan for renovations and an exit strategy?
- Skin in the Game: You generally need cash for the down payment (10-20%) and closing costs.
Conclusion
Fix and flip loans are a power tool for real estate investors. They provide the leverage and speed needed to execute profitable flips without tying up all your capital. Whether you plan to sell for a quick profit or BRRRR into a long-term rental portfolio with DSCR financing, hard money is the engine that drives independent real estate investing.
