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Fix and Flip Loans: 8 Best Options for First-Time and Veteran Flippers

Priyanka Prakash

Senior Staff Writer at Fundera
Priyanka is a senior staff writer at Fundera, reporting on all things small business. She also collects, analyzes, and reports on data to help business owners make better decisions. Previously managing editor at Fit Small Business, she's also a licensed attorney who served as general counsel at a Y Combinator startup. Priyanka's writing has been featured in Inc., CNBC, and other top tier publications. When she isn't writing, Priyanka loves to explore NYC with her husband and daughter.

With a strong economy, thriving real estate sector, and channels tuned to HGTV everywhere, house flipping is a business on the radar of so many. It’s not an inexpensive pursuit, though—regardless of whether you’re looking into house flipping for the first time or you’re a veteran, fix and flip loans can help.

Researchers from Attom Data found that house flippers renovated more than 200,000 homes in 2017, with an average profit of $68,143 per property. That’s a lot of houses—and a lot of money. Despite the popularity of house flipping, the biggest barrier to entry and success in this space is cash. Without enough money, you can’t purchase the home, pay for renovations, or find a buyer for the property when the time comes to sell.

Fortunately, there are multiple options for fix and flip financing, allowing you to quickly purchase your property and get your project underway. Even with your first flip or your fiftieth, you can use fix and flip financing options to add to your portfolio and grow your business as a real estate investor.

Here’s what you need to know about eight creative fix and flip loans, how to choose the best one for you, and what to do before approaching a lender. We’ve also included info from house flippers who’ve successfully used fix and flip financing to grow their own real estate businesses.

An Introduction to Fix and Flip Loans

Every house flip starts with actually finding the property. We’re not here to talk about that, but read this link on how to find a house to flip if you’re not quite sure where to start. Once you find the property, you’re left with figuring out how to finance the project.

And unless you’re independently wealthy, you’ll have to borrow money to finance four parts of your house flip:

  1. The purchase price of the house (you’ll need to bring 20% to 45% of the purchase price as a down payment depending on the lender)
  2. The “holding cost” of the home (e.g. insurance payments, HOA fees, and other costs of owning the home while renovations are underway)
  3. Materials and labor for the renovation
  4. Realtor costs and closing costs to find a buyer and sell the property post-renovation

The first thing you should know before searching for financing is that getting traditional bank loans for fix and flip projects usually isn’t the best route.

As a house flipper, you’re essentially a real estate investor, and your income can be seasonal and irregular. So, most banks won’t give you a business loan for fixing and flipping properties. And even if a bank is willing to work with you, their loan product might not be suitable. Bank loans are generally long-term loans—and most flippers buy, renovate, and sell a property within a few months.

Since bank loans are hard to come by, flippers usually look for alternatives. First-time flippers can ask for loans from their own circle of friends and family. Others consider more creative options, such as tapping into home equity. Once you’ve built up a successful track record as a house flipper, loans from private investors and bank lines of credit become more of a possibility. More each of these options in a bit.

→TL;DR (Too Long; Didn’t Read): Fix and flip loans finance the cost of purchasing, holding, renovating, and reselling the home. You sometimes have to get creative to finance your first few flips, but more options open up as you develop a track record as a successful flipper.

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What to Do Before Applying For a Fix and Flip Loan

Real estate investment is one of those industries where you primarily learn by doing. The more flips you have under your belt, the more you’ll understand about what works and doesn’t work for you in terms of financing.

But, there are a few things that everyone should understand before they seek funding for a fix and flip. Understanding these things will speed up the borrowing process and give your lender more assurances that you have a good head on your shoulders.

1. Create a business plan for each flip.

Fix and flip lenders customarily lend money to rehabilitate properties in poor condition. But no one knows the specifics of a property better than you do. You’ll need to supply the lender with information about each property that you’re flipping.

This is where a house flipping business plan helps. You don’t need to create a 50-page booklet for every property in your portfolio, but you should write up a thorough analysis on each property that contains the following:

  • Exact address of the property
  • Analysis of the neighborhood where you’re buying the property
  • Sale prices for comparable homes in the neighborhood (also called “comps”)
  • Strategy, timeline, and financial projections for the renovation (flippers refer to this information as the “scope of work”)
  • Background on anyone who will assist you with the project (e.g. a partner, home inspector, or general contractor)
  • Backup plan in case the renovation doesn’t go according to plan (e.g. will you rent out the property while you search for a buyer?)
  • A professional appraiser’s current valuation of the property and estimated valuation after renovations

Addressing each of these points in your house flipping business plan will encourage lenders to take you seriously. It’ll also ensure that you get a large enough loan to cover all your costs.

2. Accurately estimate renovation costs.

Lots of flippers end up not borrowing enough money from their fix and flip lender. Your whole project can fail if you don’t have enough funds to pay your contractors. The best way to avoid this problem is by creating an extensive scope of work before applying for the loan. A scope of work is a detailed outline of all the repairs you’ll be conducting on the home, the cost, and the timeline.

To create a scope of work, you’ll need the help of an experienced appraiser and contractor. Together, these parties will walk through the property, research comparable projects, and give you an estimate of cost and timeline. They’ll typically quote cost and timeline along a range (e.g. 2 to 3 months) to account for unknown contingencies.

You should have a comprehensive scope of work before reaching out to a lender, or you won’t know how much money to borrow. The scope of work will also contain two other numbers that are important for fix and flip lenders: loan-to-value (LTV) and after-repair value (ARV).

LTV and ARV

  • LTV is a comparison of your loan size to the value of the property. The maximum LTV on a fix and flip loan is typically 90%. For example, if you’re eyeing a $100,000 property, a lender who provides 90% LTV will lend you $90,000. You have to provide the remaining $10,000 as a down payment.
  • ARV is an appraiser’s estimate of the home’s value after renovations are finished. Some lenders quote loan size based on ARV. For example, if a lender goes up to 70% ARV, they will lend a maximum of $140,000 on a home that will be worth $200,000 after repairs. You can usually borrow more money from a lender who bases their loan sizes on ARV.

3. Build up your network.

One last thing to remember before applying for your loan is that real estate is a profession where connections are important. Join your local Real Estate Investors Association (REIA) or club to meet other investors.

Many real estate investors are on both sides of the table—they borrow money for their own projects but also invest in other people’s projects. So, the people you meet could end up as partners or lenders for your next deal.

→TL;DR: Before approaching a fix and flip lender, do some homework on the property. Prepare a short business plan, a scope of work, and calculate its current value and after-repair value (ARV). Regularly try to meet other real estate investors.

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Fix and Flip Loans: 8 Best Options for New and Experienced Flippers

Once you’ve narrowed down a property and done some homework on the condition and the repairs you’d like to do, it’s time to consider your financing options. Some options are better than others, depending on your experience flipping properties and your credit profile.

Here are the eight best fix and flip loan options:

Option #1: Family and Friend Loans

Best for: First-time and experienced flippers with family members, friends, or acquaintances who want to invest in real estate.

Remember what we said about building your personal network? Personal connections are a great place to start for fix and flip financing. Your cousin, uncle, or friend of a friend could end up as your fix and flip lender.

Many people invest in real estate to get above-market returns and might be interested in your project. And since family and friends have a personal connection with you, they’re likely to charge the lowest interest rates.

There are a couple cardinal rules of borrowing money from family and friends. The first is to get the terms of any loan in writing. Specify the interest rate and the time it will take to pay back the loan. A written document protects the parties on both sides. The second rule is to follow all IRS laws and securities laws that apply to family investments.

The terms of the loan will vary based on your geographic market, the size of the loan, the specs of the property, your experience in flipping, and the lender’s appetite for risk. Usually, the borrower makes no payments while renovating the house but pays back everything with interest after selling the house. The house serves as collateral for the loan in case the borrower defaults.

Rae Dolan and her husband, owners of AMI House Buyers, financed some of their first fix and flips with money that friends lent to them. “My husband made a joke on Facebook,” says Dolan, “that if anyone had $100K to put behind my sheer determination, to let him know. A friend of ours messaged him. I met with our friend and their spouse, gave them a document that explained the lending process, answered FAQs, and showed some past projects we did. They thought about it for a few weeks and came on board. Once their first loan was paid back with interest, they were more than willing to repeat it and upped the available budget.”

Option #2: Bring a Financing Partner On Board

Best for: House flippers who have deep market knowledge and experience with home renovations and house flippers with a well connected personal network (to find a partner).

Many house flippers find themselves in a frustrating position: They have the market knowledge to know what makes a good flipping opportunity, but not the money to see the project through. This is where bringing on a partner can help.

Partners can share in the following tasks:

  1. Finding the flipping opportunity
  2. Planning and managing the renovation
  3. Supplying the financing

Based on what each partner brings to the table, they share in the profits. Usually, one partner supplies the funding, while the other finds the flipping opportunity and oversees the renovation. You might use the same partner for multiple projects or different partners for different projects.

Lucas Machado, president of House Heroes LLC, has completed upwards of 200 fix and flip projects. Of partnership financing, Machado says, “How much of a share the funding partner gets depends on what they are able to negotiate with the other partner(s), and whether or not they are bringing anything else to the venture. If the funding partner is only providing the funding, nothing else, they will typically end up with somewhere between 33% to 50% of the profit. But this isn’t a ‘can’t lose’ scenario for the partners that aren’t funding the deal, because if there’s a loss, rather than a profit, the partners also share the loss.”

For example, let’s say you spend $200,000 purchasing and renovating a home (with your partner supplying all the money). If the house sells for only $150,000, you and the partner will divide the $50,000 loss. If it’s a 50-50 partnership split, that means you would have to reimburse the partner $25,000 out of your own pocket.

As with family and friend loans, you should document all terms of a joint project with a written partnership agreement. While hiring a business lawyer can be helpful in complicated situations, DIY legal help sites like LegalZoom and Rocket Lawyer can also help you put together a partnership agreement on your own.

Option #3: Home Equity Line of Credit (HELOC)

Best for: Flippers who are homeowners and have at least 20% equity in their primary residence.

Another popular option for fix and flip financing is to tap into the equity in your personal residence. This is, of course, only an option if you’re a homeowner. A home equity line of credit (HELOC) gives you access to a certain amount of money, and you can draw on the money as needed. You only pay interest on the money that you use.

Equity is the difference between the market value of your home and your mortgage balance. To qualify for a home equity line of credit, you should have at least 20% equity in your home, ideally more depending on how much you want to borrow. You should also have good credit and enough monthly income to afford your mortgage payments and pay off the HELOC.

Most banks will let you borrow up to 85% of the value of your primary residence, minus your outstanding loan balance. For example, let’s say you have 30% equity in a $300,000 house. That means you still owe $210,000 on your mortgage. A bank would extend you a maximum HELOC of around $45,000. If this isn’t enough money to complete your fix and flip project, you can combine a HELOC with other financing methods.

Brady Hanna, owner of Mill Creek Home Buyers, started flipping properties with a HELOC. “We started out using equity from our HELOC. We had a 10-year term, and the rate was fixed at 4.99% for three years and then variable at 1.5% plus prime after that.” Although interest rates are rising currently, HELOCS still have some of the lowest rates you’ll be able to find.

Besides a HELOC, other options that let you tap into home equity are a home equity loan (HEL) and a cash-out refinance.

Option #4: Using Funds in Your 401(k)

Best for: House flippers who have a lot of retirement savings, either through an employer 401(k) or Solo 401(k) but not recommended for flippers who are close to retirement age.

Yet another option for financing your fix and flip is to take a loan or withdraw funds from your 401(k) account. These aren’t good choices for someone approaching retirement age. But for younger flippers, taking a loan from your 401(k) might be worth it if the rewards outweigh the risks.

Most employer 401(k) accounts let you take a loan of up to 50% of the account balance, or $50,000, whichever is the lower amount. Solo 401(k) plans for self-employed individuals also allow loans of up to $50,000. You do pay interest on the loan, but the money is yours, so you’re paying back the principal and interest to yourself.  

The advantages trumped the risks for Kevin Polite, owner of HausZwei Homes. Polite took an early withdrawal from his 401(k) to fund his first few flips. “My thought,” Polite says, “was that you are going to be taxed on your 401k later [when you withdraw money] so this was just a way of getting at those funds earlier with a slight hit with the tax penalty of 10%. I’m seeing returns of 15% to 30% on my fix-and-flips, and I have use of the money now and feel I made the right decision.”

Some people also take a loan from their life insurance policy to finance fix and flips, similar to taking a loan from your 401(k).

Option #5: Personal Loans

Best for: House flippers with good credit who need a relatively small amount of money.

An unsecured personal loan is a very flexible financing product. Just like personal loans for business, when you take a personal loan, you can use the funds for just about any purpose, including financing a fix and flip.

To qualify for a personal loan, you’ll need a credit score above 650. Rates on personal loans can be as low as 5%, and you pay the loan back in monthly installments over a 3 to 7 year term. The catch is that the loan amounts are relatively small, capped at $50,000. So, you may have to combine a personal loan with other loan options to finance your fix and flip.

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Option #6: Owner Financing

Best for: Transactions where the seller doesn’t mind structuring the sale unconventionally.

Owner financing, or seller financing, is when the seller of the home acts as the lender. Instead of taking a mortgage from the bank or a lending company, you ask the seller to finance the fix and flip deal. Most homeowners want the money from the sale of their house right away. However, it doesn’t hurt to test the waters and see if a seller is interested in owner financing.

Seller financing offers advantages to both the owner and the flipper. Let’s you have Sally Seller and Bob Buyer. Sally is retiring and selling her fixer upper for $100,000, and she agrees to extend a loan to Bob. They agree on a down payment of 5%, a 4% interest rate, and a maximum term of 6 months. Bob gives her the $5,000 down payment now, and a promissory note for the remaining balance. He pays interest monthly.

Bob spends $25,000 renovating the house and sells it for $150,000. After selling the home, Bob pays Sally the $95,000 balance and remaining interest. He also pays his contractors for the renovation. Accounting for interest and the cost of the renovations, Bob made nearly $24,000 in profit! And Sally is happy too because she got a nice return on the proceeds of her sale.

Usually, the flipper makes interest-only payments until they sell the property, at which point they pay off the seller in one lump sum. The seller can set a “balloon date,” a specific date by which the borrower has to pay back the loan. By that day, the borrower either has to sell the property or get a new loan to pay off the seller.

As with partner financing, you should have the terms of an owner financing deal in writing. Since the seller here is a third party (not someone who you know, as is typical with partner financing), it’s wise to have a lawyer draft up the loan papers.

Option #7: Hard Money Loans

Best for: Borrowers with struggling credit and borrowers who can’t arrange alternative financing methods.

Hard money loans are non-bank loans from private investors or individuals. Hard money lenders have lower qualification requirements and can approve fix and flip funding in just 1 to 2 weeks.

Since hard money lenders work with less qualified borrowers, they charger higher interest rates, in the neighborhood of 10% to 20%. And lenders usually tack on fees, making the total cost even higher. That’s why it’s better to consider other, more affordable options first before applying for a hard money loan.

A variety of private lenders and online platforms specialize in hard money loans for fix and flips. LendingHome is a popular online hard money lender. RealtyMogul, RealtyShares, Patch of Land are hard money crowdfunding platforms, so called because multiple investors pool their money to finance your project.

Hard money loans are designed to “tide you over” until you complete the renovations on your property and sell it. As a result, the average hard money loan has a 1 year term, although longer options are available. Hard money loans also require a relatively small down payment (usually just 10 %) because the lender cares more the potential in the property than the background of the borrower.

Hard money lenders are pretty “hands on” once they approve your loan. They generally extend the loan in parts. First, they’ll give you the money for the home purchase and the first set of renovations. Once the contractor completes initial renovations, you’ll get the money for the next set of renovations, and so on.

Option #8: Bank Commercial Line of Credit

Best for: Experienced flippers with a history of successful deals and regular income.

Once you’ve been flipping properties for a while, the possibility of bank financing sometimes opens up.

Traditional bank loans don’t work well for fix and flips, but commercial lines of credit offer more flexibility. With a commercial line of credit, you get access to a specific amount of money, but only pay for what you use. This makes a commercial line of credit ideal when you’re unsure of how much renovations might cost on a property or how long a renovation might take. Commercial lines of credit work like a HELOC, but the difference is the amount of money at your disposal. Commercial lines of credit can go up to even seven figures, based on your business’s income and your portfolio of fix and flips. 

You can apply for a commercial line of credit at your local bank. Bank of America, Chase, Wells Fargo, and smaller community banks all offer small business lines of credit. The interest rates on these are very low, but remember—to qualify for a commercial line of credit, you’ll need to have an excellent credit score (above 700), a decent amount of money in the bank, and a stable history of revenues.

→TL;DR: Novice house flippers should reach out to family, friends, potential business partners, and even the current owner for fix and flip loans. If these don’t pan out, consider a home equity line of credit, personal loan, or borrowing from your 401(k). Hard money loans are popular and fast, but they’re expensive, so try other arrangements first.

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If You’re Flipping Homes, Consider Fix and Flip Loans

Many people want to become real estate entrepreneurs or grow their portfolio of investment properties, but lack access to affordable financing. Fortunately, there are many options for fix and flip loans.

These are the things to keep in mind when applying for fix and flip financing:

  • Fix and flip financing starts close to home. Think about family members and friends in your personal network who might be able to lend to you.
  • Bring a partner or the current owner in on your deal.
  • A home equity line of credit, 401(k) loan, or personal loan can also be helpful, especially if you don’t need too much funding.
  • If other options don’t work out, try a hard money lender or crowdfunding platform.

Keep in mind that many flippers use a combination of the methods above to finance their projects. And as you complete more flips, you become more well known in the community, and lenders and investors will be more open to working with you.

And there you have it. There’s no need to be an HGTV star to successfully complete a fix and flip!

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Priyanka Prakash

Senior Staff Writer at Fundera
Priyanka is a senior staff writer at Fundera, reporting on all things small business. She also collects, analyzes, and reports on data to help business owners make better decisions. Previously managing editor at Fit Small Business, she's also a licensed attorney who served as general counsel at a Y Combinator startup. Priyanka's writing has been featured in Inc., CNBC, and other top tier publications. When she isn't writing, Priyanka loves to explore NYC with her husband and daughter.

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