Fix and flip loans are a type of financing for investors who purchase properties to renovate them and resell them quickly. These short-term loans offer access to funds that can cover the cost of repairing and improving real estate investments before selling the property.

Interest rates for fix and flip loans are typically higher than conventional mortgage rates and repayment terms are often shorter. Still, this form of financing can benefit investors trying to make a profit flipping homes.

What Is a Fix and Flip Loan?

A fix and flip loan is a form of short-term financing designed to help real estate investors purchase and renovate a property. This type of loan typically has a higher interest rate—often between 8% and 12%—than a traditional mortgage.

A fix and flip loan is intended to provide investors with the funds they need to purchase a distressed or undervalued property, make necessary improvements and upgrades and sell the property for a profit within a short period. While fix and flip loans can be risky, they can also be a lucrative opportunity for skilled real estate investors looking to generate returns relatively quickly.

How Does a Fix and Flip Loan Work?

To qualify for a fix and flip loan, you’ll need a good credit score, a solid business plan and a property that can be improved and sold for a higher price. The amount borrowed typically depends on the property’s after-repair value (ARV).

Unlike other types of loans, fix and flip loans are designed specifically for short-term investments and are typically meant to be paid within 12 to 18 months. This translates into higher monthly payments, so make sure you have enough cash to cover repayment.

Some fix and flip loans have interest-only payments before the loan is due, making it easier to manage borrowing costs before flipping the property. Then, once the renovations and repairs are complete, you can sell the property to pay off the fix and flip loan balance.

Fix and flip loans are best for experienced real estate investors who know how to identify target properties, understand the costs of renovating properties and can sell the updated properties quickly.

Types of Fix and Flip Loans

The key to success with fix and flip loans is having a well-developed plan and finding a lender who is a good fit for your project. Holding costs—which can include taxes, utilities and insurance—are one of the most significant factors affecting the profitability of a fix and flip, so choosing the right loan type is vital.

Several types of funding are available for fix and flip loans, including traditional hard money loans, equity-based loans, seller financing and business lines of credit.

Hard Money Loans

A hard money loan involves borrowing funds from a private investor or company rather than a traditional financial institution. These loans typically have high interest rates and short repayment periods, but they don’t require the same level of creditworthiness.

Hard money loans can close in days, which is much faster than traditional real estate loans. These loans are designed specifically for real estate investors and make it easy to quickly finance the acquisition and renovation of investment properties.

Home Equity Loans and HELOCs

Home equity loans and home equity lines of credit (HELOCs) involve using the equity in an existing property as collateral to secure a loan. A home equity loan provides a lump sum of money up front, payable over a fixed period with a fixed interest rate.

Alternatively, a HELOC functions similarly to a credit card, providing a revolving line of credit that you can access on an as-needed basis during the draw period. HELOCs can also finance multiple flips—consecutively or concurrently, depending on the credit limit. Plus, HELOC rates are often lower than those for hard money and personal loans.

401(k) Loans

401(k) loans refer to loans taken out against the balance of your 401(k) retirement savings accounts. These loans essentially involve borrowing from yourself, as you are the account holder and the interest and principal paid on these loans goes back to yourself.

When you take out a 401(k) loan, you typically repay the loan within five years. Interest rates tend to be lower than other types of loans, and the approval process is often much faster and easier because you’re borrowing from yourself.

If you fail to repay a 401(k) loan on time, you could face penalties and taxes. Only commit to this form of financing if you’re an experienced real estate investor who can comfortably repay the loan—even if the renovations come in over budget or the property doesn’t sell quickly.

Personal Loans

Personal loans are a type of unsecured financing available from traditional financial institutions and online lenders. These loans come with interest rates between 4% and 36% and repayment terms usually range from two to seven years.

Prospective borrowers can qualify for a lower interest rate by choosing a secured personal loan collateralized by the property. Still, rates will likely be higher than those on loans tailored to real estate investing. Secured personal loans also take longer to close than unsecured personal loans because they often require a property appraisal, similar to a home mortgage.

Seller Financing

Seller financing is when the seller of a property acts as the lender and finances your purchase rather than requiring you to go through a traditional lender. Borrowers repay the seller with a monthly payment, just like a traditional loan, but the application and approval process is generally less rigorous. This allows for a quicker sale and renovation of the property, even for less experienced flippers.

Business Line of Credit

A business line of credit is a type of loan that allows borrowers to draw funds as needed, up to a predetermined credit limit. With a business line of credit, investors can borrow additional funds without having to reapply for a loan, making it a flexible and convenient option for fix and flip projects. Moreover, interest only accrues on the outstanding balance and not the entire credit limit.

These revolving credit lines are often only available to experienced real estate investors with a history of successful flips. This makes lines of credit an excellent option for seasoned investors who need to access working capital gradually over an extended period.

How To Get a Fix and Flip Loan

Getting a fix and flip loan varies by loan type and lender. However, there are a few steps you’ll need to take for most financing options:

1. Prepare Financial Projections

Comprehensive financial projections are essential to getting the financing you need for a fix and flip project. Once you identify a target property, you can improve your approval odds by preparing a document that includes an overview of your proposed project, an estimated budget and timeline, a market analysis, detailed financial projections and other relevant information. These details will help potential lenders assess your application and evaluate your ability to successfully flip the home and repay the loan on time.

2. Research Loan Options

Once you prepare your financial projections and determine how much you need to borrow and on what schedule, research options to identify the loan type that best meets your needs. A loan is the best option if you need a lump sum of cash up front, while a line of credit is best for ongoing expenses. Hard money loans may be the best choice if you need funds quickly, and a home equity loan may come with lower interest rates.

3. Find Potential Lenders

Once you prepare a business plan, begin researching potential lenders that offer loans specifically tailored for fix and flip projects. Many banks may not be willing or able to finance these types of investments due to their high level of risk. However, there are still plenty of private investors who specialize in this type of loan and can provide quick capital with fewer restrictions than traditional banks.

After identifying a few potential lenders, compare interest rates, repayment terms, fees and loan terms offered by each lender, including available loan-to-value (LTV) ratios and whether you can make interest-only payments. Likewise, look into whether loans are tied to current property value, ARV or other factors.

4. Apply for the Loan

After choosing the best loan option, submit your application and supporting documents to the lender. Be prepared to provide detailed information about your business plan, estimated budget and timeline, financial projections and any other relevant information that will help the lender assess your creditworthiness.

If you’re an experienced flipper, the lender may approve your loan faster than if you’re new to these investments. If this is your first time flipping a property, you’ll likely need to provide more information about your personal and business finances.

5. Close on Your Loan

Once you’re approved for a fix and flip loan and all paperwork has been signed, you’re ready to move forward with your project. Keep in touch with your lender throughout the process so they can provide guidance and support as needed or manage your account online. As with other types of financing, remain up-to-date on payments to keep your loan in good standing and avoid losing the property to foreclosure.