I have a question concerning house flipping. I know most use hard money lenders & private lenders to acquire the property but how do they finance the renovation? Do they borrow more than what the purchase price of the property is? Or do they tap into lines of credit (credit card, business line of credit etc...) or personal cash.

Hello @Joshua Lira ,

That is the million dollar question I’ve been trying to understand as well. I’ve done so much research, and still cannot find the correct answer. 

All of the above. There's no one-size-fits-all methodology. It all comes down to the deal and the lender you're working with. As you gain experience and rapport with lenders, you'll find it easier to borrow more with better terms.

@Joshua Lira

Personally I use my two credit cards from the orange box store to finance materials. If over $299 they don’t charge interest for 6 months on that purchase. So they basically finance it for free. Little tip, if your under the $299 you can add gift cards to bring the total up and then use the gift cards for smaller purchases. I also have cash set aside for other expenses including the monthly payments on the credit cards. The majority is on the credit cards though and gets zeroed out after closing.

@Nicole Heasley thanks for answering! I plan on financing a duplex next year with an FHA loan (renting one side, living in other). What would be the best course of action for securing financing for renovation cost.

@Marc Desrosiers great point. I do that with the blue box store too. Have you ever looked into their $50,000 project loans or anything? The rates seem high, but if you're doing a smaller place with a fast turnaround it may be worth it. 

To address your question @Joshua Lira , partners are another option. I've done deals where my partner finances everything, and I do all the work. I've also done house hacks where I pay for everything, and with roommates and my 9-5, fix the house over the course of 2 years or so. It takes more time, but it can be done if you don't mind drywall dust on occasion.

@Marc Desrosiers Do you do most of the work yourself, Or do you hire a contractor? If so how would you raise money to pay him?

@Forrest Williams

I didn’t even know the blue store did something similar. I’ve used them to get a percentage off a big purchase when you apply for a new card only to pay it off and cancel the card at closing. I’ve done that 2-3 times. I haven’t looked into project loans through either though.

@Joshua Lira

Yeah I do a lot of the work myself. I have capital set aside from previous projects to pay contractors when needed.

Sometimes if I know something needs to be done like a chimney liner or replacing an older oil tank in the basement etc that won’t scare buyers away but would get picked up during buyers inspection I’ll have it done days before closing and pay the contractors at closing. So no money out of pocket.

Originally posted by @Marc Desrosiers :

@Forrest Williams

I didn’t even know the blue store did something similar. I’ve used them to get a percentage off a big purchase when you apply for a new card only to pay it off and cancel the card at closing. I’ve done that 2-3 times. I haven’t looked into project loans through either though.

Blue Store's card can be used for 0% financing for 12 months (I think) or flat 5% off all purchases. I do that and pay it off every month.

You can look into FHA 203k Rehab Loans if you qualify. This adds the repair costs to the total loan amount.

@Joshua Lira Some HML companies will finance the reno as well. Sometimes we raise investor funds just for the reno portion. Sometimes we self fund. Depends on the project.

@Joshua Lira

Do your homework and all the prep work. Run the numbers and find out every detail as to your expenses, cash flow, etc. BP provides a great calculator you can use to help figure out all those numbers for you. Prove to your friends and family that you’re able to make this thing happen for positive cash flow and people will be asking YOU how much they can invest on your next project. Unless you’re a very small percentage of people and have access to tons of money/resources, it’s just like anything else- it takes time to save money up from your everyday job to support this stuff. If it was as easy as stumbling upon a bunch of money everyone would be doing it and it wouldn’t require the hustle that it does. Not the attractive answer than anyone wants to hear but if you want it bad enough you’ll make it happen. Good luck!

@J. T. Ford

Correct me if I’m wrong but I went to my mortgage lender about one of these and he pretty much said they don’t exist anymore. He said once Covid hit, the money for this kind of loan went dry. Let me know if you know something different because I could use it for a rehab I’d like to do!

@Joshua Lira @William Parker look for a local bank who can be flexible with the terms. Our bank for rehabs loans 75% of the purchase price and 80% of the renovation on a 1 year IO over a 25 year payment schedule.

@Ken Nyczaj Thank you!

@Chace Corbett your lender's connection to sell them in the secondary market dried up. Google "HUD 203k endorsement list" and you can find a list of all the FHA approved banks who closed 203k loans (and how many ytd) in the previous month and historically back for years. Find the banks closing in the state you're buying in and contact them all. Also, with a 203k loan, you need a direct lender, not a correspondent. So ideally, you'd want to overlay the endorsement list with another list of fha approved lenders by googling "HUD lender list". In the criteria, choose "Single Family and Multifamily Servicer-Originator" and "203(k) Rehabilitation Mortgage Insurance Program". If you cross reference these two lists, you'll find a lender who has experience closing 203k loans AND will fund the escrow for the renovation budget vs selling the loan off at closing. This loan type is a lot of extra work and there are details to learn that will make it a more efficient closing. I suggest you do some research before attempting. I'm always commenting on BP about it if you know how to follow my comments. In any case, it's a great option for a person who is highly organized and methodical. However, folks who play loose and fast will have a much more difficult experience with 203k loans. Benefits are off the charts tho, esp when considering 2-4 unit properties.

When we started my Banker laughed at me. That was 10 yrs ago. My wife wanted to flip so she could close her Daycare. We found a house for 28,000 knew we would need 10,000 to rehab. We used a credit card that had the checks for cash advances at 2.1% for 12 months. We had a $40,000 limit on the card. When we finished it in 8 months, a whole story in it’s self. When it sold we paid it off. My local banker followed closely, however it took until our 4 th flip till he would loan on one. Even then he would only loan on the purchase repairs were on us. So the credit cards got used a lot. Now we have a line of credit we can use. Just remember it has taken 10 yrs 45 flips and a lot of perseverance. We also use a private lender a lot for our rentals.  Good luck.

@Joshua Lira  I  recommend this book to read over the holiday-if convenient of course. It is concise and to the point. 

Investing in real estate with low or no money down by Brandon Turner.

By the time you are done, you would have tools in your giant creative financing tool box to work with.

@Joshua Lira

Hey Josh,

How we have structured our deals thus far has been to approach a hard money lender. Get funding through money partner or private loan to fund the down payment and interest payments.

@Chace Corbett

We have a renovation loan program. I just closed on a 400k reno for a 750k ARV. This type of loan requires a contractor that is approved by us (isn't hard for most contractors to get approved). You can't just do the work yourself. It's interest only during the renovation period. I've only done this with conventional loans, I will take a look to see how far it expands into other types of loans for anyone interested. The contractor is on a draw schedule and when each milestone is completed, more money is released. It's a solid program!

@Chace Corbett I asked my mortgage lender about 203k loans. And got. Not at this time. So yea. Your not the only one

@Joshua Lira Many of the bigger hard money lenders will finance a portion of purchase and rehab, depends on the lender.  I've worked with several, and these are the breakdowns I typically see:

100% purchase and rehab up to 65% of ARV

90% purchase and 100% rehab up to 70% ARV

90% purchase and rehab up to 70% ARV

I've also used private money to fund the closing short term as I was waiting for another deal to sell. (this is Gap Funding)  You could also use a Gap loan from a private lender to fund the rehab.  Gap funding has higher interest rates, but it's a smaller amount, so it's not a deal breaker usually.

Another option is using a personal loan from either a bank, or a lender like SoFi.

Many lenders will do an acquisition and construction loan.