Rehab Property vs. Fix-and-Flip: Why This Matters for Financing

If you’re looking for financing for a commercial real estate purchase, you need to understand how vital the investment goal is to your success at finding the financing to close. It’s not that it’s hard to find funding for certain investment strategies, it’s just that traditional loan products are not designed to accommodate them. That can make life challenging for house flippers, because even when you find a short-term loan that you can use, it’s not always built for people who have plans like yours. Often, those short-term financing options are explicitly built as bridge loans, and that’s why you need a lender who specializes in the fix and flip loan.

Loans designed for short-term property holdings where the investor will fix and resell have a few differences from loans designed for rehabilitation and refinancing. While both tend to be for one to three years, have the same general interest rate windows, and allow for interest-only payments, the rehabilitation loan is built to minimize your debt footprint while the fix and flip option is built to maximize your working capital. This is quite important, because that difference dictates how the loan is valued, where the working capital for building improvements will come from, and how much work you will do to the property.

Your fix and flip loan is built around that. Where a rehabilitation loan is designed to finance the property while you work to get it ready for its stabilized financing for long-term earnings, your fix and flip product is designed to cover the property and the cost of getting it back to the market, or at least, it covers most of it. Depending on your lender, the fix and flip product will get you anywhere between 70 and 90 percent of the funds you need to do the work and make it back to market. Of course, you need to calculate your costs carefully. Taking out the wrong size loan or scheduling one to be due too early can be costly.

The key to being effective with this kind of short-term financing is adding up your costs. Figure out what the property value ceiling is for the neighborhood, then price out the cost to get your property up to that line, and finally, figure out the cost of financing based on the average interest rates your lender quotes. That will tell you if you’ve got the right property for your next investment, and it will also let you know how much you need to finance with your fix and flip loan.

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