What is a Fix and Flip or Bridge Loan?

A fix and flip loan—also referred to as a bridge loan, swing loan, interim financing, or gap financing—is a short-term loan that provides you with the working capital you need to meet the immediate financial obligations of your fix and flip project. This kind of loan is typically for a 12-month term or less and can be obtained in a matter of days. Like most other types of property loans, collateral is required for an underwriter to back the loan. What’s so interesting about a fix and flip loan—and what makes it such a good option for those who are new to the business—is that the collateral can be the projected value of the rehabbed property. This can be organized in two distinct ways: by basing the amount you can borrow on the after repair value (ARV) or by basing it on the loan to cost (LTC) ratio.

After Repair Value (ARV) Loans

An ARV fix and flip loan is appropriate for properties that will increase significantly in value after they’ve been renovated—as much as 50 to 100 percent on top of the purchase price. Most lenders will cap an ARV loan at between 65 and 70 percent of the property’s projected ARV.

Let’s say the property costs $100,000, and the rehab expenses will be $50,000. The total investment to make this home marketable is $150,000. You’ve done your research, and you estimate you can sell the property for $200,000.

The lender will do its own research to determine if your investment calculations are accurate and your selling price is realistic. Since its findings corroborate your data, it agrees to give you a loan that’s 65 percent of the ARV, which equals $130,000. That means you only have to put up $20,000, or in this case, 10 percent of the ARV, yourself. If you sell the property for $200,000, you’ve made a $50,000 profit.

Loan to Cost (LTC) Ratio Loans

A loan to cost ratio loan is appropriate for properties that, while still expected to make a profit upon sale, aren’t projected to sell at a 50 to 100 percent profit margin. Depending on the market, a lender could be prepared to underwrite an acquisition and renovation LTC loan of 75 to 80 percent.

For example, you’ve found a property that costs $125,000 and will require $45,000 to rehab. Your research indicates you’ll be able to sell it for $210,000 after renovations. The lender offers you a loan of $127,500, which means you’ll have to put up the remaining $42,500 yourself. If you sell the rehabbed property for your asking price of $210,000, you’ll make a profit of $42,500.

Fix and Flip Loans Rates

Depending on the type of lender, whether it is hard money, private money, or a bank, rates can range significantly. The terms of a loan will also vary, so it is important that investors shop around until finding a lender that best suits their individual needs.

Ultimately, the type of bridge loan you choose becomes a matter of balance—meeting your fix and flip property’s needs without overextending your personal financial risk.