Refinancing From a Short-Term Fix and Flip To Long-Term Debt

IN THIS GUIDE

Fix and flip projects continue to be in high demand in the United States, and for good reason. In 2021, the average profit made per home was $67,000. Property flipping proves to be a significant source of income for many.

Once an investor gets into the fix and flip industry, new doors for future investment start to open. A borrower can convert their short-term fix and flip loan to long-term debt through several refinancing options. These options give access to lower interest rates and more funds for additional flipping projects or investments.

What Is A Fix and Flip Loan?

A fix and flip loan is a short-term loan that helps an investor purchase and renovate a property. Oftentimes the property is sold for profit within 12-18 months. Once the property is sold, the investor pays off the loan from the profits.

A fix and flip loan is ideal for anyone who wants to make a quick profit in real estate. It is seen as a fast turnaround for profit in the market. However, an investor generally has to prove that the property will be profitable to obtain the loan.

What Is A Cash-Out Refinance?

A cash-out refinance is when an investor takes out a loan on a property that they already own. This amount is generally larger than the original loan, which allows for additional spending on other projects or current renovations.

A cash-out refinance is a particularly good option for those that follow the Buy, Rehab, Rent, Refinance, Repeat (BRRR) method. A cash-out refi allows the borrower to get access to additional funds quickly, using the current property as collateral, for other projects.

Why Would I Want To Refinance From A Short-Term Fix and Flip To A Long-Term Debt?

Refinancing a short-term fix and flip loan to long-term debt is often referred to as a “fix and hold” loan. This process is becoming more common in real estate.

When you refinance a short-term fix and flip loan, the appraiser generally looks at the value of the property after renovations. Refinancing a short-term fix and flip loan results in better refinancing terms and lower interest rates.

How To Refinance From A Short-Term Fix and Flip Loan To Long-Term Debt?

You can refinance from a short-term fix and flip loan to long-term debt either with your original lender or with a new lender. The lender will look at the new value of the property to determine new interest rates and payment schedules. Generally, interest rates are lowered once a short-term fix and flip loan is refinanced. This proves more beneficial for long-term investments.

The two most common means of converting a short-term fix and flip loan to long-term debt are a home equity line of credit (HELOC) and a cash-out refinance.

What Is The Difference In Underwriting Between The Two?

The underwriting, the behind-the-scenes process in determining eligibility for a loan, between a short-term fix and flip and long-term refinancing loan have some key differences to note.

  • Short-Term Fix And Flip Loan. The customer’s banking and buying history, as well as the property value, are analyzed for a fix and flip loan. The lender will also look into the prospective value of the property being “fixed and flipped”, the prospective rehab costs of the property, the previous credit history of the borrower, financial background, and proof of funds.
  • Long-Term Debt. Both fix and flip loans and long-term refinancing options are asset-based. Acquiring long-term debt, however, looks more closely into the borrower’s history and financial stability rather than their buying history and proof of funds. 

What Is The Difference In The Interest Rates, Terms, & Fees Between The Two?

It’s important to examine the short-term and long-term repercussions of a loan when looking to make further investments. The interest rates, terms, and fees between a short-term fix and flip loan and a more conventional long-term loan will vary greatly.

  • A Short-Term Fix And Flip Loan. This type of loan has higher interest rates, flexible terms, less paperwork, and lower fees than a traditional loan.
  • Long-Term Debt. Refinancing into long-term debt has significantly lower interest rates, more rigid terms based on the borrowers’ personal history, more paperwork, and higher fees than a fix and flip loan.

Cash-Out Refinance As Part Of A BRRR Strategy

Cash-out refinancing allows a borrower to follow the BRRR Strategy with a lot more financial flexibility. A borrower can get a cash-out refinancing option on a property that has already gone through rehab, or renovations. 

This gives the borrower more funds for additional projects, with little to no money out of pocket. This proves to be a huge advantage, as a borrower can continue expanding projects with significantly more cash on hand.

How Much Equity Can I Cash Out To Purchase A Fix And Flip?

The exact amount and percentage will vary between different lenders. The majority of lenders allow a borrower to cash out between 80% and 85% of the value of their property.

This means that if your property is valued at $500,000, you can cash out $400,000 to purchase an additional fix and flip project (minus the amount still owed on the original loan).

Which Type Of Lenders Offer A Cash-Out Refi On A Fix And Flip?

Most lenders will offer a cash-out refinance loan on a fix and flip project once the project has undergone rehab. The lender will appraise the property post-rehab to determine a fair value and will usually lend up to 80% of the appraised value.

Cash-Out Refinance Eligibility

Cash-out refinance eligibility will vary slightly depending on the lender. However, these are the general guidelines that a borrower can expect to see:

  • More than 20% equity in the property.
  • A credit score of 700 or higher is ideal.
  • The loan-to-value ratio of 80% or higher.
  • Proof of income and employment.

HELOC Vs. Cash-Out Refinance For Fix And Flip

A home equity line of credit (HELOC) and cash-out refinancing are two common methods to get cash quickly for your next fix and flip project.

  • HELOC. A HELOC does not require refinancing of the property or a switch to a new mortgage. An investor can borrow a smaller amount of money against the property, only paying interest on the amount that is borrowed. In addition, A HELOC is generally easier for an investor to get with a lower credit score. 
  • Cash-Out Refinance. A cash-out refinance requires a new mortgage with new interest rates and terms. A cash-out refinance generally has lower interest rates than a HELOC. A borrower must borrow the full value of the property, rather than smaller amounts. In addition, interest rates are fixed with a cash-out refinance whereas they are variable in a HELOC.

Pros And Cons Of A Fix and Flip Cash-Out Refinancing

Pros Cons
  • Chance to lower interest rates.
  • Predictable monthly payments with a fixed interest rate.
  • Interest is tax-deductible.
  • More cash is available for additional projects.
  • The property is used as collateral.
  • Requires higher credit than traditional loans.
  • Must pay closing costs.
  • New terms and more paperwork can be time-consuming.

 

Cash-Out Refinance On A Fix And Flip Property FAQ

Let’s take a look at some of the most commonly asked questions regarding fix and flip cash-out refinancing.

How Do I Pull Equity Out Of My Investment Property?

You can pull equity out of your property either through a cash-out refinance or a home equity line of credit (HELOC). You would talk with your lender about options for a cash-out refinance if you are looking for fast cash or lower interest rates.

How Much Equity Do I Need For A Cash-Out Refinance?

Typically, borrowers must have 20% of the equity in their property for a cash-out refinance option or an 80% loan-to-value (LTV) ratio of the current value of the property.

How Much Are Closing Costs On A Cash-Out Refi?

The closing costs, which include organization fees and an appraisal fee, are generally between 2% and 5% of the new loan amount.

Are Rates Higher On A Cash-Out Refi?

Cash-out refi generally has lower interest rates, making it a more appealing option. However, interest payments might increase if the loan amount is greater than the original loan amount. Also, remember that closing costs are generally higher with a cash-out refi.

It is beneficial to examine the new interest rates, payment amounts, and closing costs when starting a cash-out refi to guarantee it is a smart financial decision.

What Is The Max LTV?

The maximum loan-to-value (LTV) ratio is typically 80% of the value of the home. This means you must leave 20% of the value of the property untouched.

For example, if a property is valued at $500,000, you can borrow up to $400,000 on the property. Remember that you must subtract the currently owed amount on the mortgage from what you can borrow.

Conclusion

There are many advantages and disadvantages associated with a fix and flip cash-out refinancing. Cash-out refinancing can be a great tool to help fund additional projects as it gives you access to the funds relatively quickly. However, this type of refinancing does require a higher credit score and results in steeper fees.

The general rule of thumb is it is a good option if it saves you money. It’s important to evaluate the value of the property, rehab costs, and potential of future projects before committing to cash-out refinancing.

Start your loan application

Lender / Broker? Request a demo