House Flipping Financials Archives - Page 3 of 3

You've done your homework, you know your local real estate market like the back of your hand, and have found the perfect house to flip. The big question now though is how to get money to flip a house? There are 5 tried and true methods to not only fund the purchase of the home but also to provide the needed capital to perform the necessary updates and repairs to sell the house for top dollar. The 5 tried and true methods to get money to flip a house include finding an investment partner, hard money loans, private lenders, traditional banks, and using your own money and assets. Each approach to funding a house flip has its pros and cons, so let's take a closer look at each to see which financing option might be right for you in your house flipping business. Find a House Flipping Investment Partner House flipping partnerships can take many forms and be structured in many different ways to suit the needs and wants of the parties involved. When looking for a house flipping partner the main goal is to find a partner that has either a portion or all the needed capital to purchase and rehab the home. Don't forget as with any partnership, everyone needs to bring something to the table in order for the partnership to work. If you are using a house flipping investment partner to fund the house flip, you might bring value to the partnership by finding the deal, putting in sweat equity, and or managing the house flip through to completion. If you are going to use a partnership to fund your real estate flip you can expect to split the profits with your partner for access to the partner's capital. Splitting the potential profits from a house flip can be divided in any way that is fair and agreeable to all parties involved. A common profit split though when it comes to an investment partner is 50/50, where one partner provides the necessary funds for the house flip and the other does all the needed work and management of the house flip. Investment Partner Pros Can require little to no investment of your own money. Does not rely on your credit score and or financial health to secure the money. Someone to bounce ideas off of and provide a second opinion. Provides a secondary network of people and professionals to pull from. Allows you to split the load and responsibility with someone else. Investment Partner Cons One of the most expensive ways to finance a flip usually requiring the profits to be split. Can be disagreements and conflicts in the direction of the flip between partners. Potential personality conflicts between partners. Some house flipping partners could act in a dishonest or unethical way. Hard Money Loans Hard money loans are considered asset-based loans meaning they do not rely on your credit score or financial ability but instead rely on the house itself as collateral to fund the deal. When using hard money lenders they will use the value of the home to provide the loan for the purchase and rehab of the property as well as place a lien on the home much like a traditional lender to secure their money. Hard money interest rates are much higher than typical home loans and can range anywhere from 10 to 15% depending on the particular lender and their perceived risk with the deal. In addition to the loan interest rate, hard money lenders will typically also charge upfront points on the loan as well that typically range from 2 to 4% of the loan value. As you can see hard money loans can be very expensive and should and need to be used as a short-term financing option. As any potential profits, you might receive from the flip can quickly be consumed by the high cost of money with hard money loans. Also, keep in mind that hard money loans typically have a 6 to 12-month loan term before maturity, meaning that the entire balance will be due on the loan. So when using hard money loans it's important to stay on a timeline to make sure that you have bought, rehabbed, and sold the flip before the full loan balance comes due. When considering hard money loans and lenders it's important to do your homework to make sure that you completely understand the contract you are entering into as well to make sure that you are working with a reputable hard money lender. Hard Money Loan Pros Funding does not rely on your creditworthiness or credit score. Quicker loan application process compared to a typical home loan process. Short-Term Financing Allows you to work with a lender that understands real estate investment. Hard Money Loan Cons High cost to money due to higher interest rates and points. Short term loan timeline can potentially cause you to discount the home to get it sold before the loan comes due. Unreputable or unprofessional hard money lenders in the marketplace. Hard money loans are far less regulated than more traditional forms of financing requiring extra due diligence and research. If you're looking for more information on hard money and how to obtain it, a great book to check out is the "Hard Money Success Formula" on Amazon. Private Lenders and House Flipping A private lender can be a great option for house flipping because there are typically fewer hoops to jump through and less time needed in order to fund your house flip. Unlike large institutional banks, private lenders can usually loan money how they see fit as it typically is their own money they are lending. Interest rates also tend to be lower compared to hard money loans when funding your house flip. Because there is little regulation or standard protocol when it comes to using a private lender it's important that all parties fully understand the terms of the loan and the contract that is being entered into. For example make sure that everyone is clear on the interest rate being charged, the term of the loan, payment schedule, what happens in case of default or if the home flip is not able to be sold for a profit, etc... One major drawback to private lenders is that they can be difficult to find, which can lead to extensive research and networking in order to find one. Private Lender Pros One of the cheapest ways to finance a house flip. Shorter time to obtain funds. Flexible terms and repayment schedule. Private lenders might rely on varying sources of trust and collateral to provide the loan as opposed to just creditworthiness or personal financial health. Private Lender Cons Difficult to find requiring extensive networking and research. Little to no regulation with private lending so trust is a key factor with private lenders. Potential personal liability if the deal goes bad. Traditional Banks and Loans Of all the potential places to receive money to flip a house traditional and institutional banks are the most challenging. The biggest issue when trying to obtain funds to flip a house through a traditional bank is they don't really have any loan products that are well suited to house flippers. In addition, banks are not set up to evaluate a potential house flip or individual flipper other than through more traditional valuation methods such as personal assets and credit score. However, they are worth mentioning on this list as they can offer some of the best terms and lowest interest rates compared to other house flip financing options. When trying to get a loan to flip a house or houses through a traditional bank, your best bet is to work to obtain a business loan and not an individual home loan. Banks do not offer home loan products that are well suited for short-term house flippers. As traditional 30-year mortgages that banks typically offer will take too long to complete and have too many lending requirements and stipulations to be a viable option for house flipping. When approaching a bank for a business loan to flip houses it's critical to have a well-developed and defined plan that is explained in-depth in a written business plan. Banks need to see facts and figures and current and projected numbers to evaluate their risk when considering a business loan no matter what the business is. For this reason, if you have no track record or past experience when it comes to flipping houses it is unlikely that a bank will loan you money. Traditional Bank Loan Pros Attractive terms and lower interest rates on loans. Dealing with a reputable and regulated lender. Easy to locate and find traditional banks and branches. Traditional Bank Loan Cons Difficult to obtain funds to flip houses. Will rely on your personal creditworthiness and assets. Limited loan products suited to house flipping. The slow loan process and extensive red tape to get through. Tapping Into Your Own Money and Assets One of the riskier approaches to funding a house flip is to use your own cash or assets to fund the house flip. While this approach will allow you to keep 100% of the profits you also have 100% of liability if things go wrong. When it comes to using your own money to fund a house flip there are 4 main ways including liquid cash, IRA's, home equity, and credit cards. Liquid Cash When flipping houses, cash is the king as it provides you the most amount of options when purchasing a home and will cost you nothing other than opportunity cost. While it might be nice to have a ton of free cash on hand if you are reading this article about how to get money to flip a house this is more than likely not your situation. IRA's When considering how to get money to flip a house, IRA's should be a last resort when it comes to funding a house flip, as they are meant for your retirement and future well being. As a general rule, it's typically a bad idea to take from your future to fund your current needs. Also depending on your age and the type of IRA you have there can be steep penalties and fees to access the money. Home Equity Loan If you own your own home and have existing equity in the home, this can be an attractive way to finance house flips. As the interest rates on home equity loans or lines of credit tend to be much lower compared to other alternative forms of financing, in addition, you can leave a home equity line of credit open allowing you to fund multiple house flips over time. Credit Cards While you more than likely will not be able to fund the entire purchase of a home with credit cards you can consider using credit cards to fund the rehab of the house flip. Caution must be exercised though when using credit cards to flip houses because of the high-interest rates. As the interest on the money can quickly eat into any profits you might have received from the flip. Your Own Money Pros Easy access to money. Depending on the type of money you are using there can be little to no interest owed on the money. Allows you to keep potentially 100% of the profits. Your Own Money Cons Exposed to 100% of the liability if things go wrong. Can set you back financially for years to come if the flip does not work out. Depending on the type of funds you're using it can expose you to high interest and penalties when using the money. For even more information on how to get money to flip a house, check out our article "How to Flip a House the Complete Guide".