You see it everywhere now. Reality television shows are even getting into it. Famous celebrities, coverage on USA Today and CNN, fixing and flipping is the big thing now that the real estate market is turning around.
Real estate investors, who are encouraged to realize profits on their investments in a short period, will look at flipping properties that they buy. They will acquire properties at lower prices, quite often those under foreclosure, fix them up and then sell them immediately. Most of these fix and flip properties are bought and sold within a year.
The problem is however, that most lenders prefer to finance loans that are for the long term, as their income is made from the interest on these loans. That is also one of the reasons that prepayment in many cases does attract a penalty. This is why, they are not willing to give out fix and flip loans, as they are repaid within a year, and lead to very limited interest income. Investors who use this method of investing in real estate need to look at other lending sources for the fix and flip loans they need. Most of this can come from private money, hard money and portfolio money. Keep in mind though, that short term financing does attract higher interest rates, because of the shorter period of interest collection. There is also an increased administrative cost as all documentation needs to be done for the loan, which becomes invalid in a very short time.
Interest rates on fix and flip loans can be anywhere between twelve and eighteen percent, if hard money is used for them. An additional charge is levied on the loan balance, which can increase the costs. The amount of loan has to be enough to acquire the property, spend the necessary money on fixing it up, and then any costs for selling it. This may not be easily accepted by lenders, in which case the investor has to look for other means to finance fixing and selling costs.
Fix and flip becomes a much more doable proposition if you get a loan of 75% of the purchase price, and arrange for the balance 25%, and costs for repairing and selling on your own. This becomes easier, once an investor has completed the first deal. In such cases the interest costs become quite low and manageable. It is easier to acquire homes at lower prices if cash is offered, and quite often this can become a problem for a new investor, who has to find the necessary finance. At this stage it may be advantageous to look for cash rich partners, who have the money to put out. It will reduce the profits, but does allow you to make a start to the business.
Buying houses to fix and flip has to be done very judiciously, and properties acquired at much below the market rate. This is not an easy thing to do and requires constant attention to distressed sale home owners, who are looking to quickly liquidate their own debts. This is why it is necessary to have the finance arrangements ready for fix and flip loans, even before you start looking for properties.