So, you want to dip your toes in the waters of flipping houses in California. Congratulations on your move.
Often, fix and flip investors in California lack enough capital to fully fund property purchases and necessary renovations. Fix and flip hard money loans come in here. What is a fix-and-flip loan? And what should you expect when applying for one? This post seeks to answer these questions, and many more you might be asking now. That being said, let us dive in.
Fix and Flip Loans: Hard Money Lenders for Flipping Houses in California
Fix and flip loans are short-term loans tailored to real estate investors looking to purchase and renovate a property to sell it at a profit shortly. The renovations may range from basic improvements to a complete reconstruction of an existing home. You can also use the loan to purchase land with a single-family unit in bad condition and replace the property with a better unit, with the intent to sell it.
Note that hard money loans are used exclusively for residential property investments.
As California hard money lenders are primarily concerned with the property’s value rather than your background check, the chances of getting approved for this loan are high. In fact, you can access the loan within one or two weeks of submitting your application. But note that flip and fix hard money loans in California come with higher rates because of their shorter payment terms. The rates range typically range between 7% and 13%, depending on the loan term (usually 12-36 months).
Another interesting feature of the fix and flip loans is that the monthly payments are interest-only. You pay off the principal amount in a lump sum at the end of the loan term.
To get financing for house flipping in California, you must have a credit score of at least 600, some house flipping experience, and a debt to income ratio lying somewhere between 35% and 45%. But remember that for fix and flip loans for California Real Estate, the lenders are more interested in the property’s value over your credentials.
Popular Financing for House Flipping
» Bank Secured Loans
While banks are the commonest lenders in the US, they often do not offer short-term loans for house flipping. They prefer long-term loans because they generate more profits. But in the few instances they decide to offer fix and flip loans, they usually put in place stringent terms and conditions, which may not be agreeable to you as an investor. Often, banks weigh heavily on your credit history and may not even consider your house flipping experience or the opportunity you present to them. Still, the lengthy application process can be too time-consuming for house flipping in California.
» Hard Money Loans
A hard money loan is the best option for financing fix and flip projects in California. It is a short-term financing option whose terms range from few months to few years. The real estate serves as the loan’s collateral. Riskier than a traditional loan, a hard money loan has higher rates. But fix-and-flip investors benefit from lower qualification requirements and quick access to funding, even if they lack a proven track record.
Hard money loans do not fund 100% of the property’s value. As such, these two ratios are taken into account:
- Loan to Value(LTV) ratio: This ratio figures the loan amount based on the market value of the distressed property. LTV= (Principal loan amount ÷ appraised value of the property) x 100.
- After Repair Value(ARV) ratio: This ratio calculates the loan based on a rehabbed property’s projected value. Most lenders offer ARV loans at 70% of a property’s after-repair value-the purchase price plus the value from renovations.
Recommended Reading: An Ultimate Hard Money Lending Guide
Why Other Loans not as Optimal as Hard Money Loans
Other options like 401K loans, bridge loans, and cash-out refinance loans may fund house flipping in California, but they come with some limitations and may only be used under certain circumstances. This makes them less ideal for house flipping in comparison to hard money.
Talking of 401k loans, withdrawing from your retirement account during the annuity’s accumulation phase can trigger two penalties: surrender fees by the insurer and a 10% early withdrawal penalty from the IRS. Unlike hard loans, bridge loans cannot be used to renovate a property. While cash-out refinance loans have more stringent eligibility requirements and longer terms ranging between 15 and 30 years. For all these reasons, they are not ideal for house flipping like Fix and Flip Hard money Loans.
Take Advantage of the Opportunity for Flipping Homes
If you are thinking about flipping homes in California, it would be best to take cautionary steps to profit from your investment. Firstly, stick to your financial capabilities and be realistic with your expectations for a fix and flip project. As such, always venture into a fix and flip project with a plan of what needs to be done.
Secondly, carefully examine the property and its neighborhood. You do not want to focus your resources on a property in a bad neighborhood or one that requires major renovations likely to hamper the investment’s profitability. Instead, focus on properties with no extensive damages that are near easily accessible amenities, including schools and shops.
Considerations to Successfully Flip Luxury Homes in California
» Get Your Budget Right
When dipping your toes in property flipping, it is important to set a budget that will enable you to make all the necessary renovations without leaving anything to chance. Still, you must account for other payments on the property in case it does not sell as fast as you expected.
» Find Good Contractors
With solid DIY skills, you may opt to take on the renovation. Whereas DIY renovations can save you an incredible amount of money, hiring a good contractor can help you avoid costly home improvement mistakes besides getting your home up for sale faster. You will want to work with a licensed, qualified, and organized contractor with quality references and who can supply a professional, accurate bid.
» Find the Right Financing
It is hard for traditional lenders to help you with fix-and-flip financing. Professional Hard money lenders, therefore, become the best alternative. However, fix and flip loans have higher interests than typical loans. As such, budget carefully to minimize financial risks, especially when your property stays in the market longer.
RTI Bridge Loans-Your Go-To Fix and Flip Hard Money Lender in California
While it may be impossible to evade risk in a house flipping project in California, quality financing from a tried-and-true fix and flip lender goes a long way to safeguard your initial investment.
With over three decades of loan experience, RTI Bridge Loans is your preferred hard money lender in California serving Los Angeles and Orange County. We offer fast fix–and-flip financing backed with competitive rates and impeccable services. Call us at (562) 857-2285 or contact us online to receive a free loan quote or learn more about how we can help you with quick funding for your next fix-and-flip project.