“Flipping” is an investment strategy and technique with one essential objective — to generate a short-term profit. While this strategy potentially produces impressive profits, the process of “flipping” is an investment known to be highly speculative. Successful investment flippers often have a knack (or sufficient experience) for recognizing this risk and, to carefully factoring in this elevated risk when evaluating the merit of an investment opportunity. While it is nearly impossible to eliminate all investment risk, smart investors learn to proficiently manage it. For our purposes, short-term earnings are defined as profits realized in less than one year. Two industries that have found success with the application of a flipping technique include –
- Stock trades.
- Real Estate.
The narrative that follows focuses upon how real estate investors utilize ”flipping” investment strategies, and, how they take advantage of special financing products (loans & lines of credit) designed to meet the needs of a real estate flipper.
The Art of Real Estate Flipping
Real estate flipping is an investment technique in which an investor buys (or intends to buy) a piece of real property with a strategic exit plan to sell the real property for a profit in less than a year. There are several ways to realize short-term profits in the real estate realm.
Real Estate Flipping Strategies
The two primary real estate “flipping” strategies are –
- Taking advantage of a rapidly appreciating neighborhood or market. This type of flip is more technically related to market conditions, rather than a specific property.
- The “fix and flip” real estate strategy (aka the “Reno Flip”, as in renovation) happens when an investor locates what they believe to be an undervalued (or distressed) property, and purchases it with the intention of upgrading the property (perhaps, with sweat equity) with renovations or cosmetic alterations to sell as quickly as possible.
A word of caution — inexperienced real estate flippers need to fully grasp that there are marketplace, economic, and governmental influences that occur with great potential to reduce (and maybe even eliminate) profits. This knowledge is simply vital to one’s investment success.
What is Flip Funding?
Flip funding is a viable source of financing for real estate investors intent on turning a quick profit. This financial product is a great fit for the unique financing scenarios brought about by a real estate flip transaction. The financing used to fund flip transactions is remarkably similar to many unsecured business credit products; however, flip funding works with real estate flippers only.
As a creative, niche-financing option, funding for flip transactions offers underwriting flexibility to customize their flip-transaction offers to fit flip scenarios. A majority of lenders who offer financing for flip transactions are unsecured business credit providers and private investors as they are more willing to take on the flip’s elevated risk than a traditional bank. However, these private investors expect larger returns for the additional risk present in a real estate flip transaction. The additional compensation is generally expressed as higher interest rates. Additionally, unsecured business credit companies may offer financing at higher interest rates as well.
Real estate flippers can expect the financing instruments for flip transactions –
- To be processed quickly, often with 24 hours.
- To be funded quickly, sometimes in under a week, where available.
- To be accessible to first-time fix-and-flip investors.
- To be somewhat customized to fit each unique flip scenario. This flexibility generally allows for a larger number of approval decisions.
A flip funding financial product will generally require the submission of the following at application –
- The application — which is available online. Begin your research online and reach for helpful insight from financing experts.
- A Creditworthy credit profile. Minimum credit scores vary from lender to lender.
- Personal, legal identifying documents. Businesses licenses/business credentials are required if they apply to the financing situation.
- A written statement regarding general plans for the flip investment.
The loan amounts and interest rates for the funding of flip transactions vary based upon the lender, the real estate transaction’s merit and the applicant’s creditworthiness. Additionally, a lender, as needed, may choose to revise the loan-to-value (LTV) limit for each flip funding loan application.
How Real Estate Investors Use Flip Funding
The most basic investing principle — Buy Low/Sell High — is the primary investment principle a flip transaction is based upon.
A flipping strategy is most effective in the real estate market when used as follows:
- In the Rapidly Rising Housing Market. — There are times within a typical real estate market cycle where home prices rise uncharacteristically fast. A rapidly rising marketplace requires access to quick cash. This reusable line of credit is quite valuable during these types of flip transactions. This can happen for several reasons –
- A Market recovering from a recession.
- A change in interest rates.
- Political Unrest.
- The gentrification of once distressed areas, among others.
- In a Fix and Flip Strategy.– A fix and flip investor applies a different version of a flipping strategy. The fix and flip investor searches for undervalued or distressed properties to buy. If they find a motivated seller (i.e. a seller who needs to sell FAST), a ‘fix and flip’ deal becomes an even sweeter investment opportunity.
Once purchased, the investor can repair/renovate/upgrade the real property to include home features current borrowers are demanding in new home purchases. Often an investor prepares the home to be offered as turnkey. The ‘fix and flip’ real estate investment is fast-tracked with an intent to sell as quickly as possible.
The Benefits & Risks Of Real Estate Flip Funding
Each investment carries with it some form of risk. A profitable investment is said to have beaten the risk present in the investment.
- The flip financing provides easy and quick access to cash for an investment decision that needs a quick answer. This is especially beneficial for flipping during a rapidly rising home price environment.
- The lenient underwriting guidelines allow for larger volumes of approvals.
- Loan to Value and Loan Limits vary by lender.
- It is offered without income check and asset verification.
- Get 0% interest offers (for up to 2 years) when you provide a personal guarantee.
- Loan amounts vary but are available for qualified buyers up to several million dollars.
The most obvious risk associated with flip transactions is the concept of the timing of the transaction. What first appeared as a solid deal could change in a moment if market conditions should change suddenly. Technically, this timing issue is interrelated with an investment’s prolific risk of uncertainty. Investors are advised to stay vigilant regarding their financing investments. Theoretically, real estate flipping sounds straightforward, however, it requires sound real estate and financing knowledge to consistently turn a profit.
Flip Funding vs Hard Money Loans
Flip Funding loans and hard money loans are often mistakenly considered as the same type of financing. And while each type of funding offers flexibility regarding underwriting guidelines, these financing types differ in one significant way. Flip funding is available to borrowers who maintain a creditworthy personal credit profile. Conversely, hard money loans are specifically designed for borrowers with less than perfect personal credit profiles.
During that time, Judi began contributing to financial education endeavors and authoring CEU coursework to meet state/ARELLO standards. Judi has held a mortgage broker's, real estate, NASD Series 6 & 63, and LCAM licenses during her career. Recently completed two terms as the President of the condominium where she resides.
She is a passionate photographer/videographer/artist - skills she chooses for a variety of business ventures. When not writing about facts and figures, she remains balanced through the practice of Reiki and kindness.
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