Loan Options for Fix and Flip Property
Getting into the real estate business can be easier than you think, especially if you are looking to fix and flip homes or commercial properties in your area. The biggest hurdle to this process is securing financing for the property and renovations. There are two major options, each with its own pros and cons, when it comes to loans, traditional or non-traditional lenders.
Traditional Lenders
Pros
You can go to traditional lenders, such as banks, for your fix and flip project financing. One of the major benefits of this is that it can help you build or maintain your credit with relatively small, fixed, interest rates. For the average homeowner, going to a traditional lender for your loan can mean more options and lower interest rates, but doing your research can help you choose the right loan with the best benefits for your case.
Cons
Some of the negatives associated with traditional bank loans include needing a credit check, waiting a long time for a lending decision and not having the preferred forms of income. With traditional lenders, you will need to submit your financials and have your debt-to-income ratio calculated. If you are self-employed or coming out of a period of unemployment, then you may not have the types of income that banks will count. For instance, many self-employed people will not have a W-2 tax form to show the bank and may not have regular paychecks.
Non-Traditional Lenders
Pros
There are many different types of non-traditional lenders for fix and flip financing including private loans, angel investors and partners. These can rely less on credit and debt-to-income ratios and more on collateral and value. One of the benefits of this type of lending is they overlook debt repayment. They will underwrite on the properties as-is and after repair value. Typically alternative lenders, and private investors want to see that the loan amount id no more than 75% if the completed as-is value. This is a huge benefit for first time investors because they don’t rely as much on experience. Rather they rely on the appraiser telling them that this is a good deal. This is also an added benefit. You are relying on an experience lender telling you if this is a good loan or not.
Cons
Although, it is much easier to secure alternative financing. This risk that the lender is taking always comes with larger fee’s. Typically interest rates on average are 4-5% higher than a traditional bank. Also, lenders typically add origination fee’s to the loan that gets paid by the borrower at closing. If you can secure traditional financing from a credit union or bank this is always your best option. However, you need to be prepared when presenting a loan scenario to conventional lenders. They require much more documentation, and make the process much slower than what a alternative lender has the ability to do.
Summary
Before you start a fix and flip project, it is important to have the right financing. There are many ways you can get the funds to purchase and improve a property. This will include using traditional and non-traditional lenders. Each way will have its own benefits and negatives. The more research you do the better value you are likely to obtain on interest rates and other terms.
