Fix and Flip Financing: A Guide for Real Estate Investors

Ever wondered why fix and flip financing is so crucial for real estate investors? Beyond the emotional appeal of owning a property, the financial gains from real estate investments have been consistently strong. In fact, over the past 145 years, real estate has outperformed equities, bonds, and treasury bills in average returns.

The best part? You don’t have to pay the entire purchase price upfront when buying an investment property. Fix and flip financing lets real estate investors use other people’s money to fund property purchases and renovations. Here’s a guide on what you need to know about investment property financing and working with real estate investment lenders.

Capital is Key, Even with Fix and Flip Financing

Even if you’re using fix and flip loans, you’ll still need cash on hand. Real estate investors relying on real estate investment financing often have to put down 10-30% of the purchase price in cash. Additionally, there are other costs—closing fees, title company fees, insurance, and taxes—all of which need to be covered by the investor.

While many lenders offer 100% financing for renovation costs, investors must front the money for the first draw. Most investment property loans reimburse renovation expenses in stages, so having cash on hand for each phase is crucial.

Credit Matters in Fix and Flip Loans

Even though fix and flip lenders are typically more lenient than traditional lenders, credit still plays a role. Most investment property lenders require a minimum credit score of 620-660. If your score is below this, work on improving it before applying for real estate investment loans. To learn more about FICO credit scores, check out this guide on credit scores by Investopedia.

Speed and Efficiency Matter in Fix and Flip Financing

The speed of fix and flip financing is vital. Conventional lenders often take 30-60 days to close, which can make you miss great deals. In contrast, fix and flip loans are designed for efficiency, allowing real estate investors to act quickly in competitive markets.

While many new investors tend to focus on interest rates, for short-term investment property loans, factors like closing costs, fees, and speed are more critical. The difference between a 7% and a 10% interest rate is minimal over a six-month term, so prioritize speed and efficiency when choosing real estate investment lenders.

Line Up Financing Before You Find Deals

Imagine you find a property that’s priced $30,000 below market value, but the seller demands a quick close. Without fix and flip financing already lined up, you might miss out on the opportunity. Every real estate investor should have a pre-approved lender ready before making an offer.

Speak to different investment property lenders and understand their terms. Preparation is key to securing investment property loans when it matters most.

Build Relationships with Investment Property Lenders

Strong relationships with real estate investment lenders can help you succeed in fix and flip financing. Loan rates and fees often depend on perceived borrower risk, but a consistent history with the same lender can lead to better terms. Some lenders even offer incentives, such as reduced origination fees for repeat borrowers.

Building trust with your lender can lower costs and increase profitability for future real estate investments.

Always Have an Exit Strategy

Most real estate investors plan to sell their fix and flip properties for a profit. But what if the property doesn’t sell? In such cases, investors need a contingency plan, such as lowering the price, offering concessions, or refinancing the property and converting it into a rental.

Having a solid exit strategy is essential in fix and flip financing. Delays can be costly, and investment property loans are typically short-term, so plan accordingly.

Plan Your Fix and Flip Financing Before Anything Else

Before searching for a property to flip, ensure you have a financing plan in place. The success of any real estate investor depends heavily on securing the right fix and flip loans. By presenting a clear plan and understanding lender requirements, you can position yourself to work with the best investment property lenders.

Whether you choose fix and flip financing or another type of investment property loan, always have a solid plan before signing a contract.