Newbie real estate investors often ask how to flip houses with no money. And to them, it might feel like a stupid question: There’s no way you can get started flipping houses without at least a little money of your own… right?
True—to a degree. Investing in real estate is easier with money. But you can indeed flip houses with no money. It’s not even as hard as you might think—even if you’re a new investor. You just need a little bit of hutzpah, the courage to escape your comfort zone, and an understanding of how to start.
How to Flip Houses With No Money Down
Flipping houses without funding projects yourself involves using other people’s money (also called “OPM”) to fully finance your deals. A lender extends a loan to you to purchase and rehab the property, and you repay them the initial loan amount plus interest.
However, traditional banks and lenders rarely extend a loan covering both the property and rehab. So where do you find OPM for flipping homes?
1. Real estate investor partners
One of the simplest ways to start investing with no money is to find a partner with money. Think about close friends, business associates, co-workers, relatives, business owners, or even another real estate investor or rental property owner.
If you can’t think of anyone off the top of your head, then start thinking about the people you see on a regular basis. This may include:
- Anyone in your network with a successful business
- Your doctor or your dentist
- Your attorney
- Anyone who invests in the stock market
Ideally, you ask the partner for the money to finance the deal and you to do all the legwork. In this simple arrangement, the two of you will split the profits 50-50. Your partner reaps the financial rewards of the deal by chipping in the money but not the time.
When you first enter the house flipping business, it may be tempting to create a formal partnership right away. We recommend holding off for now. Many real estate investment partnerships succeed wildly, but just as many go down in flames. As an amateur home flipper or new investor, remain independent until you have a business plan and the flipping know-how needed to attract a solid partner.
PRO TIP: Real estate investors of any sort can make great partners, but investors already flipping homes will likely be even better. A veteran home flipper brings both money and experience to the table.
To attract an experienced investor, figure out first what value you add to the deal. Maybe you have the deal-finding know-how or a long list of contacts. Utilize all your skills and exhaust all your options.
2. Hard money lenders
Another great source of funding for a rehab deal is a hard money lender. Hard money lenders lend at a very high interest rate—and usually charge points on top of that. But on the plus side, they tend to care less about whether you have good credit and instead focus on the property’s potential—specifically, the after-repair value (ARV).
This source of OPM can be especially useful if the property can be rehabbed and sold quickly—requiring only a short-term loan. Like any other kind of loan, the shorter you hold the loan, the less you pay in interest. The longer you hold the property, the more you pay.
Hard money interest typically ranges between 14 and 20 percent—often with four to six points on top of that—so pay off these loans quickly. While hard money lenders can be a great starting place, there are certainly better sources of funding with better rates.
For example, if you borrow $100,000 from a hard money lender at 16 percent and it takes six months from start to finish for repayment, your interest charges would be $8,000. And if you are required to pay points on top of that, it’ll be an even higher price—four points equals an additional $4,000, for a grand total of $12,000 in interest charges!
If you hold the flipped property only half that time, your interest charges would be $6K as opposed to $12K. This is why hard money is solely preferable for properties you know you can flip quickly.
3. Private money lenders
Private money lenders are perhaps the best source of funding for no-money deals. They’re just regular people, like family members, friends, and acquaintances, who want to invest.
Sometimes, these individuals aren’t actively seeking investment opportunities—they just have money sitting around that they may be open to investing if you ask. Private money lenders might have money in banks, IRAs, 401(k)s, mutual funds, or even an abundance of home equity in their home.
Because you can typically negotiate better interest rates, private money lenders are preferable to hard money lenders. With private money lenders, you can control terms and interest rates more often because you set the rules and rates… not the lender.
Offer private money lenders a high enough interest rate to entice them to invest. The rate must be lucrative enough to make it worthwhile and fair enough for you to make a profit—even in the worst-case scenario.
Consider finding out the returns from their other investments, then beat that number. When the stock market performs erratically, lending to a flipper with a guaranteed rate of return is attractive.
4. Wholesaling to other flippers
Wholesaling allows investors to make money from real estate without ever taking ownership. Sounds great for flipping houses, right?
Real estate investors looking to wholesale properties must find properties worth flipping and get them under contract. You negotiate the terms with the seller, such as closing costs and purchase price. Next, you find a house flipping investor to actually purchase the property and complete the rehab.
Wholesalers make money based on the spread they negotiate between the deal and the amount the buyer is willing to pay. Alternatively, wholesalers can make money based on a fixed price of the final sale—i.e., when the flipper sells to the end buyer. This could range from 5 to 10 percent. You don’t take ownership of the property or do any rehab yourself, making wholesaling an easy way to start flipping homes without any money.
Wholesale successfully by building up a group of investors or contacts interested in flipping houses. Then, your job is done after negotiating a deal with the seller. The investor handles the closing and rehab.
5. Crowdfunding your flip
Crowdfunding is when a group of individuals collectively finance a loan. These lenders—aka investors—each contribute a small amount of the needed funds. In return, they earn interest on top of repayment.
This method can be time-consuming when it comes to raising money. However, some specialty crowdfunding real estate websites may pre-fund a deal.
One downside to crowdfunding: you have a limited ability to negotiate. However, in some cases, you can avoid a down payment.
6. Seller financing
When traditional lenders or other creative financing options aren’t available, consider seller financing. With this method, the property’s seller finances the purchase. You won’t need to qualify for financing (i.e., have a good credit score) or exhaust your network of private lenders.
Investors can search for available properties with optional seller financing or find a fix-and-flip opportunity and reach out to the owner to see if they’re interested in financing. Yes, seller financing might require a down payment but often a smaller one than conventional mortgages or traditional lenders require.
What’s even better, you may be able to avoid paying commissions to real estate agents by dealing directly with the seller.
7. Traditional banks
Yes, banks do lend money—sometimes even to real estate investors! If you have a good relationship with a banker or your bank, they may offer a workable loan for flipping a house or funding your investment.
Don’t walk into a bank thinking, “There’s no way they’ll ever give me a loan.” Then you’ve already lost.
Although traditional bank loans are more time-consuming and challenging to acquire, they are an option if you have a solid business plan and you are confident in your ability to turn a nice profit.
Where to Find Investors for House Flipping
Your first task, if you want to flip houses with no money: get off the couch and get out there! Order some business cards and start networking.
Immerse yourself in the local real estate market. Surround yourself with people already doing what you want to be doing, such as fellow real estate investors and flippers.
The people you meet at networking events are usually some of the best possible partners—as well as potential new investors. Absorb as much real estate investment information from these new friends as you can.
Here’s where to find them:
- Your local REIA (Real Estate Investors Association)—or form your own
- Real estate investor meetings advertised on Meetup.com or the BiggerPockets Forums
- Your local Chamber of Commerce, Business Networking International chapter, and other community organizations
- Volunteering at a local charity.
Don’t wait for opportunities to come to you. Instead, learn the house flipping business, actively acquire the know-how, and go find investors on your own.
Questions? Comments? No money strategies to add to this list?
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.