Real Estate Tips |9 min read

Fix-and-Flip Loans for Beginners 101: The Best Expert Guide

In this fix-and-flip loans for beginners guide, we’ll uncover the core basics of hard money fix-and-flip loans for first timers. Let’s break down the biggest things you need to know about these loans for your investment.

Main Takeaways

  • Hard money fix-and-flip loans are expedited loans designed for real estate investors. You can use these loans to pay for expensive renovations, like kitchen and basement fixes. If you calculate the potential ROI correctly, as outlined in this article, you can maximize its value.

Fix-and-Flip Loans for Beginners 101: The Best Expert GuideTitle of Contents

What are Fix-and-Flip Loans?

Fix-and-flip loans, specifically hard money fix-and-flip loans, are expedited loans for real estate investments. Home flippers often choose hard money loans for their projects because of their unique terms. As Maryland Hard Money Loan providers, we know these loans are defined by their quick delivery timeframe, repayment efficiency, and flexible criteria.

What is the Difference Between Hard Money Loans and Traditional Loans (AKA “Soft Money”)?

Borrowers receive funding much faster from hard money fix-and-flip loans than they do conventional loans. Also, they can get over the repayment stage more quickly. Furthermore, because independent lenders offer fix-and-flip loans, they can tailor the loans to each investor’s unique needs. Bigger, bureaucratic banks can’t achieve this. Finally, since hard money lenders are most focused on the investment property’s value, it can be easier to qualify for these loans.

Pros of Hard Fix-and-Flip Loans

With hard money fix-and-flip loans, most lenders cover 100% of the renovation and release costs in a series of draws. What’s more, you can receive these draws based on a schedule you and the lender agree upon together. This way, you can get funds throughout the renovation process as different phases and issues arise.

This is one huge advantage hard money fix-and-flip loans have over traditional ones. After all, traditional loans only cover a percentage of renovation expenses. In that scenario, you’d be forced to scrape together the rest of your money yourself. Here are the renovations a hard money loan can pay for:

Common House Flipping Renovations Hard Money Loans Can Cover

Every property is unique. However, stated that the average price scale for a full home renovation spans from $19,481 to $86,997, with the average cost being $51, 384. Let’s delve into some specific property renovation costs that can be covered with a fix-and-flip loan.

Kitchen Renovation

Kitchen renovations are some of the most sought-after upgrades for a fix-and-flip. Unfortunately, they’re also one of the costliest aspects of a property to redo. It can cost upwards of $14,550 to $40,400 to get it done. On the small side, you need to factor in minor fixes, like a backsplash or better lighting. Unfortunately, though, expansive remodels will require bigger expenses, like new flooring, custom cabinets, and smart appliances.

Bathroom Remodel

Bathrooms hugely boost your property value. On the other hand, their renovation costs make you pay the price for that boost. On average, bathroom renovations cost $11,250. If your size and materials are smaller scale, they may only cost $6,000, but if they are more complex, they could be even steeper than the original average, like $30,000.

New Flooring

When you change your flooring, it can transform your property in buyers’ eyes. Yet, the higher-end flooring installation materials can rack up $10 or more per square foot. Needless to say, these costs snowball up quickly,

Basement Remodel

Basement renovation costs can be an average of $21,700. Furthermore, each average square foot adds up to $30 to $75 per square foot. What’s more, you must consider unique add-ons that increase a property’s marketability, like a home gym or home theater. These bonuses can have a huge ROI—and a huge upfront bill.

What Are the Risks of Hard Money Fix-and-Flip Loans for Beginners?

While hard money fix-and-flip loans are known to support investors who require quick capital, it’s always important to do your due diligence. So, if you’re weighing hard money loans as a financing option, these are factors you should think about.

  1. Higher Interest Rates: Hard money fix-and-flip loans’ interest rates are often higher than traditional bank loans. These rates can range up to 15%. On the bright side, some lenders, like us, try to keep the rates a bit lower than that, like 12%.
  2. Collateral-Based: Properties secure hard money loans. Because of that, if a borrower defaults on their loan, they could need to forfeit the property.
  3. Short-Term: If you don’t stay organized and driven, you won’t have a proper exit strategy to pay back the loan within its accelerated time frame.
  4. In Short Supply: Hard money fix-and-flip loans are usually exclusive to private investors or small lending companies. So, you may have to look harder to find these loans.

How to Calculate the ROI of a Hard Money Loan for a House Flip

Every real estate investor looks to their ROI as their goal and guidepost.  So, before you take the jump and get hard money fix-and-flip loans, you should get a feel for your costs, fees, and route to profits.

By calculating your ROI, you can make better-informed decisions about your loan’s potential. Without further ado, take a look at some crucial calculations and numbers for your ROI.

Identify Total Investment Costs

To calculate your ROI, you need to first find out your total required loan amount from your hard money lender. By this, we mean what you must repay, plus interest.

Then, you want to add in any fees your lender charges, like origination, underwriting, or processing fees. In addition, consider the costs tied to closing your loan, like insurance, appraisal fees, and escrow charges.

Next, remember to include property taxes, insurance, repair or renovation costs, and regular maintenance expenditures.

Project Property Income

Next, you need to assess your investment’s potential income. This will come in the form of your projected selling price.

Determine the ROI

Last but not least, to come up with the ROI, you should start with your net profit. Your net profit is the difference between the property income and property expenses. So, this formula can allow you to find your ROI.

  • ROI = (Net Profit / Total Investment Costs) x 100

This might seem unclear, but it won’t for much longer. Now, let’s discuss an example using real numbers below.

Example of Calculating ROI

Let’s say you’re thinking about a hard money fix-and-flip loan for a project that costs $200,000 to purchase. With this, you put down a down payment of $40,000 and have a hard money loan cover the rest. In total, this amounts to $160,000. Furthermore, imagine you have a 10% interest rate and a year-long loan term. After renovations, you aim to sell the property for $275,000. 

With these numbers, here’s how you can calculate your monthly interest rate.

  • Monthly Interest Payment = (Loan Amount x Annual Interest Rate) / 12 (number of loan term months)
  • Monthly Interest Payment = ($160,000 x 0.10) / 12 = $1,333.33

At this point, you should determine the cost of renovations and your loan payment, taxes, insurance, and maintenance amounts. The numbers we’ll use for this example are as follows.

  • Estimated Cost of Renovations = $50,000
  • Loan Fees = $5,000
  • Estimated Yearly Property Taxes = $3,000
  • Yearly Property Insurance = $1,200
  • Maintenance and Repairs (per year) = $2,000

Next, we’ll delve into how to determine the ROI. To start off, you must consider your total investment costs, loan costs, total interest payments, expenses, and projected net profit.

  • Total Investment Costs = $210,000 
    • (Purchase Price + Renovation Costs)
  • Loan Costs = $165,000
    • (Loan Amount + Loan Fees)
  • Total Interest Payments (12 months) = $15,999.96
    • (Monthly Interest Payment x 12)
  • Property Expenses = $6,200
    • (Property Taxes + Insurance + Maintenance and Repairs)
  • Projected Net Profit = $42,800.04
    • Projected Selling Price – Total Investment Costs – Interest – Property Expenses
    • $275,000 – $210,000 – $15,999.96 – $6,200 = $42,800.04
  • ROI = 20.38%
    • (Projected Net Profit / Total Investment Costs) x 100
    • ($42,800.04 / $210,000) x 100 = 20.38%

Are the Loan Investment Risks Worth the Returns?

As you know, when your ROI is on the higher side, it means your investment is more profitable. On the other hand, a lower ROI implies lower returns.

Before pursuing a hard money fix-and-flip loan, borrowers should thoroughly evaluate their financial situation and assess the risks. Additionally, it’s important to have a clear plan for repaying the loan within the specified timeframe.

How to Qualify

Sometimes, people find it easier to be eligible for hard money fix-and-flip loans than traditional mortgage loans. To boot, there are a few ways to increase your odds before applying for one.

Save for a Larger Down Payment

Many hard money lenders ask for a larger down payment than they do traditional loans. That said, it’s a good idea to funnel in as much money as possible for a down payment. Most lenders want around 10% to 20% of the loan amount for a down payment. Still, each lender has different rates, and they may require a lower or higher down payment.

Consider Your Credit Score

Although your credit score doesn’t automatically decide your entire eligibility, you still want to keep your score up. As a rule of thumb, most hard money lenders will ask for a credit score of about 600. This number is easier to meet than traditional loan requirements. Still, it’s worth working on, even if it isn’t the biggest factor in getting a hard money loan.

Have a Solid Plan for Your Loan

Before a lender accepts your hard money fix-and-flip loan proposal, they want to be assured you have a concrete plan for your investment. For example, they will want to look at your renovation plans and costs. So, you should show your lender what you plan to do with the property, as well as why it’s a good investment.

Jumpstart Your Investment with MHML

By following this hard money fix-and-flip loans for beginners guide, you can map out the steps necessary to earn an ROI on your investment.

And to make those odds even higher, you can work with an independent lender, one that can work directly with you to craft loan terms. We can advise you throughout the process to ensure you squeeze every penny of value from your loan. Even better, our team has years of hands-on real estate industry experience, so we can give you a few pointers there, too. Call us today to gain a partner in your home-flipping journey.

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