Investing in a run-down, abandoned home and fixing it up so that it can be sold for a profit is a popular way to get involved in the real estate industry. There are plenty of television shows that make it seem like a fast, easy way to make big money. While profits can certainly be made, you first should make the time and money investment to get there. Unless you have a large amount of cash lying around, you will most likely have to obtain a loan for the purchase and rehab. Here are some things you need to know before getting your first fix and flip loan.
You Still Need Cash
In the majority of cases, you won't be able to finance 100 percent of the sales price and the cost of renovations. You'll likely need a substantial amount of cash in order to make the deal attractive to your lender. This is true whether you're applying for a traditional loan, or if you're seeking a loan from a hard-money lender. A good rule of thumb is to have at least 20 percent of the amount you expect to need in capital reserves before you go to a lender. Remember, the more cash you have on hand, the lower the loan amount and fees will be.
It's Not Always Easy
If you have less than perfect credit, and you're new to the fix and flip world, you're likely going to run into roadblocks along the way. Traditional mortgage lenders, banks and credit unions view these types of investments as risky, and therefore avoid them. Loans of this nature also take a great deal of time to finalize, which could mean losing the opportunity and having to start over. Hard-money lenders, on the other hand, aren't as concerned with credit scores as they are with the potential the borrower has to complete the project and pay back the loan. They are more likely to release funds quickly, even to a new borrower, thus making the process faster and easier.
There Is Risk Involved
Even if you do thorough market research, investing in real estate is a risky business. There will never be a guarantee that your property will sell, especially in a narrow time-frame. As with any other investment, you should be prepared for the possibility of losing money on a fix and flip deal. You can mitigate some of the risk by seeking the advice of others that are successful in the business. Hard-money lenders are generally very experienced and willing to assist borrowers, unlike their traditional loan counterparts. Just keep in mind that no matter the outcome, you are responsible for repaying the loan in its entirety within the specified terms.