Flipping houses is a sought-after investment preference for many people looking into investing. There is good money to be made there if you know what you are doing. How does one get started if you do not have your own money yet?
A conventional mortgage was designed to be in place for the long-term to help buyers purchase a long-term residence. As such, they are not as useful for a short-term investment like house-flipping. As investing in real estate through the fix and flip method became more and more popular, a new loan mtype was created to be the bridge between the property’s purchase and renovation costs and the buyer’s capital.
What Are Fix and Flip Loans?
Fix-and-flip loans are short-term loans, typically 6-12 months duration, that are used to cover the costs of purchasing and renovating a residential property. The loan is usually repaid with the proceeds from the sale of the renovated property.
Often, this type of property investment is purchased through a bank short sale, a foreclosure, probate or at auction. Then the buyer performs a range of improvements, from minor renovations to major reconstruction of the home and property. The home is then sold, hopefully for enough of a profit to repay the short-term loan and have plenty left over.
In the past when someone needed real estate financing, they usually had to go to an insurance company, government agency, or bank for the money. But the many strict requirements involved in qualifying for these types of loans made things impossible for the average real estate investor.
This is where private lenders came in. A private lender uses their own capital to finance investments, such as real estate. With different approval requirements than an agency has and a much faster pace than the usual financing process, private lenders have become an important asset to investors.
Besides the speed and flexibility of obtaining a fix-and-flip loan from a private investor, another advantage of this type of loan is that the collateral for the loan is the property being purchased with it.
If you are unable to pay back the loan in the agreed-upon time the property itself will revert ownership to the lender in payment for the loan. Usually none of your other assets are involved. With the fast and easy process to achieve the loan and the relatively low risk involved for both borrower and lender, it is no wonder fix-and-flip loans are so popular.