A renovation project always starts with the numbers: the list price plus renovation costs plus a cushion. Experienced investors know to have enough cash available to cover renovations and float the property until it sells. While it’s ideal to have cash on-hand to secure a new investment, the funds are not always there when a lucrative deal is on the table. The key to finding the best financing for a fix-and-flip starts with a plan and aligning the ideal outcome with funding options.
Investigate Financing Options
The financing that works best for your fix and flip project varies according to the timetable, budget, and loan requirements. Explore these funding options:
Crowdfunding
Advantage: This alternative lending method often requires less documentation to secure funding. Sometimes crowdfunding is a fast way to secure the funds needed to start work.
Disadvantage: Investors might not raise all the funds needed to cover the required renovations, leaving them scrambling to find funding elsewhere.
Retirement
Advantage: Some self-directed 401(k) plans allow individuals to borrow against their retirement fund. Any interest paid goes back into the 401(k) instead of an institution.
Disadvantage: You’ll miss out on tax benefits, and may have loan fees. The balance could be due immediately if you leave your job. If you default on the loan, you’ll incur the early withdrawal penalty.
Construction Loan
Advantage: Covers short-term work for major renovations.
Disadvantage: Construction loans can be tough to find. These loans must be well-managed; lenders release the money in stages as the renovations are completed.
Hard Money
Advantage: Get access to quick funding with a private money lender. The loan is against the property, not the investor or developer, so leveraging other assets or having a great credit score is not as important. It can be used for a number of purposes, like renovations.
Disadvantage: Know these loans have shorter terms and high interest rates. It’s easy to accrue interest the longer the property lingers on the market. The fix and flip renovation must quickly sell or the renovator could lose money on the project.
Bridge Loans
Advantage: Bridge loans “fill the gap” between purchase and reselling. They can carry a property over until an investor can close the sale or refinance to more lucrative, fixed-rate terms.
Disadvantage: They are a shorter-term funding option, usually maxing out at three years. As such, they have higher interest rates than long-term financing.
Note About Financing
Approach renovation financing with a reasonable budget, a realistic timetable for renovations, and an accounting for listing on the market. Know the market for the property’s price point. Renovated luxury properties may go quickly, or the local area may be experiencing a slowdown. Note that structures requiring significant renovations may not receive the full loan value until after the property has been rehabilitated.
Once you know the financing program that best fits the fix and flip property’s circumstances, focus on the lenders most likely to provide the funding you want. For instance, if you want a commercial loan for a renovation, work with lenders like OneSource specializing in quick-closing fix and flip loans.