Best Way to Fund Live In Flip?

Question

Hi All, I'm planning to do a live in flip sometime in early 2017, probably around April or May if all goes well. I'll be looking to buy a distressed property in the $60,000 - $90,000, and should have roughly $25,000 of my own money to invest as a down payment. I'm hoping to finance the rehab costs with an 18 month interest free credit card with a $20,000 limit. I'll be doing as much work myself as I can, along with a handy family member, and will just be hiring out the skilled trades, so I think $20,000 should be enough for the type of houses I'll be looking at. I plan to do the work over the course of a year and then sell, as I'll pay a much lower capital gains rate that way.

My question is, given the information above, what would you recommend I use to finance the flip? Hard money, private money, crowdfunding, an online flip lending service, or something else? Hard money will be very expensive for a year+ loan and will really eat into the profits, so that's at the very back of my list right now. Any advise would be greatly appreciated. Thanks!

My question is, given the information above, what would you recommend I use to finance the flip? Hard money, private money, crowdfunding, an online flip lending service, or something else? Hard money will be very expensive for a year+ loan and will really eat into the profits, so that's at the very back of my list right now. Any advise would be greatly appreciated. Thanks!

Tim Porsche · Answer

@Adam Bontrager

Thanks for the advice, I really like the idea of doing a low interest HELOC loan but I'll have to talk to my banker sometime soon here and see how much I would actually be able to take out with a HELOC. I think it would be a great option if I can get enough out...thanks again!

Adam Bontrager · Answer

@Tim Porsche

Yes, I think it could definitely affect your chance at the credit card.  I was assuming that you already have the credit card.

I would suggest applying for the credit card first.  If the card has a $0 balance, I would think the effect on your credit score would be less than the HELOC.  I am no expert in this particular area though so take that with a grain of salt.  :)

Tim Porsche · Answer

@Adam Bontrager

Interesting, so assuming the house is worth $145,000 and I have, say $88,000 remaining in debt on it, that means I could borrow anywhere between $28,000 - $42,500 roughly right? That means I would just need to come up with another $10,000 - $20,000 in that case somewhere for a $70,000 - $80,000 house. Now, another question, if I would get a HELOC loan like that, would that hurt my chances of being able to qualify for a $20,000 no interest for 18 months credit card, as they would see the extra debt I would then have?

Adam Bontrager · Answer

@Tim Porsche

I think the banks typically cap the amount of debt you can have on one house at about 80-90% of the value of the home.  So depending on the value of the home and the amount of debt left on the first mortgage you may be able to get a good chunk of change out of that.

If you plan on making the new property your primary residence (at least temporarily), you may be able to use a HomeStyle renovation loan.  It's similar to the FHA 203k loan.

Tim Porsche · Answer

Hi @Adam Bontrager

Thanks for the reply. I did think about going the traditional financing route, but doesn't the house have to be in habitable condition before they will lend you money? That was the only issue I had with that. If I'm going to be buying distressed properties, they may not be habitable at first. I have a conventional 20% down loan on my first SFH property I've had for two years now, and an FHA loan on the second property which is a duplex where I currently occupy the first floor, and since you can only have one FHA at a time FHA 203k wouldn't be an option I don't think.

HELOC is an interesting idea. I probably have about $40,000 - $50,000 in equity in my first house. How much of that can I pull out with a HELOC loan do you know?

Adam Bontrager · Answer

Hi @Tim Porsche

Would you be able to use a HELOC from your current home?  You could also just look at a conventional mortgage if you have $25k as a downpayment.  Pretty much any kind of short term financing (e.g. HML, private money, crowdfunding, etc) is going to be pretty expensive, especially if you don't have an established track record.

One of the benefits of "house hacking" is the favorable financing terms that owner occupants can obtain.

Have you checked into FHA 203k loans at all?