Are you a real estate investor? Have you thought about taking advantage of fix and flip loans in California? With the strong housing market, more and more people are looking to get into this lucrative business. The downside in California for many getting started is the high price tag that a property can bring. Utilizing fix and flip loans, however, is one way to apply leverage and overcome this issue.
Fix and flip loans are short term loans made by private individuals, groups or funds. These loans are typically interest only and usually made for a term of 12-24 months. They do not typically have prepayment penalties, and are able to close much faster than many bank loan products. The real benefit of utilizing fix and flip loans, however, is the leverage that can be utilized.
Fix and flip loans differ from other loans on the market in one major and fundamental way that is important to understand when discussing leverage. Most loans use a property value or purchase price upon which to base the loan amount. So a purchase of $500,000 and a loan to value of 75% would mean a loan amount of $375,000. Fix and flip loans in California, however, base the loan amount on the after repair value, or ARV.
The after repair value, or ARV, of a property is how much the property will be worth once the rehab has been completed. This is typically a higher amount than the purchase price. So for example, in our $500,000 purchase mentioned above, a property with an after repair value of $750,000 at that same 75% loan to value ratio would mean a max loan amount of up to $562,500. That is almost $200,000 in additional leverage that can be utilized!
There are other moving parts to consider - this does not mean you can purchase a property and get cash back at the closing! However, it is not uncommon for the loan amount to be larger than the actual purchase price. How does this work?
In a fix and flip loan, since the loan to value is based on the after repair value, the funds to complete the work must be funded into the loan as well. These funds are typically held in a fund control account and released as work is completed on the property. This ensures the work will be done to reach the value that the loan is based on. So in the above scenario, with a $500,000 purchase price, a $750,000 after repair value on a property that needs $100,000 in work, broadly speaking you would have a $100,000 fund control account.
Looking at these numbers, it should be clear that you still need to bring cash in on this transaction, but by utilizing the leverage available to investors on a fix and flip loan it should also be clear that this higher leverage point substantially reduces the amount of cash that needs to come in to close. Again, just loosely speaking in broad strokes, the difference would be approaching $200,000! The math here is simple - on a 75% of purchase price loan you would need to bring in $125k, plus another $100k for the rehab work to be done. On the fix and flip rehab loan, you would need only $37,500!
This does not take into account loan fees, closing costs, any interest reserves that may be required, etc, but it is a simple overview that illustrates the ability to utilize leverage with a fix and flip loan to greatly reduce the cash expenditure required to purchase and rehab a property you intend to sell.
We specialize in private money loan solutions throughout California. Feel free to reach out to us with any questions or scenarios. We are happy to discuss the solutions available and go over terms you may not understand. You can visit our website to learn more about our California fix and flip loans!