Fix and Flip Financing: What You Need to Know
Overview
Fix and flip investing involves purchasing distressed properties, renovating them, and selling for profit. This strategy requires specialized financing since traditional mortgages won't cover properties in poor condition. Fix and flip loans bridge this gap by funding both acquisition and renovation costs.
How Fix and Flip Loans Work
A fix and flip loan functions as a short-term, asset-based loan secured by the property itself. Lenders advance funds for purchase and release renovation money in stages as inspectors verify completion. Similar to construction loans, funds arrive incrementally rather than upfront. Borrowers typically pay interest-only during the project, with full repayment upon sale.
Key Terms to Know
- LTV (Loan-to-Value): Based on current as-is value, typically 65 to 75%
- LTC (Loan-to-Cost): As a percentage of total project cost, often up to 85 to 90%
- ARV (After Repair Value): The projected value after renovation, lenders also cap at 65 to 70% of ARV
- Points: Origination fees, typically 1 to 3 points
- Term: Usually 6 to 18 months
- Rate: Typically 10 to 14%+
What Lenders Evaluate
- After repair value (ARV), supported by a comparable sales analysis
- Detailed renovation scope of work and budget
- Borrower experience, number of prior flips
- Exit strategy, when and how will the property sell?
- Credit score, minimum typically 620 to 640
- Liquidity, cash reserves to cover holding costs and overruns
First-Time Flippers
New investors can secure funding, though lenders typically impose higher rates, require greater equity, or demand a co-borrower with experience. Having a detailed, credible scope of work and a licensed contractor under contract goes a long way toward gaining confidence.
Speed Matters
Time significantly impacts profitability in fix and flip investments. Carrying costs, interest, insurance, utilities, property taxes, accumulate daily. Quick lenders closing in 7 to 14 days often justify premium rates over slower conventional options, as delays mean lost opportunities.
Educational content only, not advice. KQT Advisors, LLC is a commercial loan broker; we are not a lender, attorney, accountant, financial advisor, or fiduciary. We do not originate loans or make lending decisions. The information in this article is provided strictly for general informational and educational purposes and reflects our understanding at the time of writing. It is not, and must not be construed as, financial, tax, legal, accounting, investment, or any other professional advice, and creates no advisor-client relationship. Loan programs, rates, terms, eligibility requirements, fees, and approval criteria are set by individual lenders, the SBA, and other parties and are subject to change at any time without notice. Examples are illustrative only and not guarantees of outcome. Nothing here is a commitment to lend, an offer of credit, or a representation that any specific structure will be available to or appropriate for any borrower. Always consult your own qualified financial, tax, and legal advisors before acting on any information in this article. To the maximum extent permitted by law, KQT Advisors, LLC and its principals, employees, agents, and affiliates disclaim all liability for any direct, indirect, consequential, or incidental loss or damage arising out of any use of, reliance on, or inability to use the information in this article.