Television shows about house flipping can make it look easy, but when it comes to carrying out such an enterprise on your own, you may discover a lot more goes into it than appears on camera. One of the most difficult steps in the process can be securing adequate financing.
Typically, a fix-and-flip loan will be different from a regular home improvement loan. Not every fix-and-flip job will qualify for traditional financing, and your credit may not be good enough credit to get your application approved.
If you’re seeking financing for this kind of investment, there are options aside from conventional loans. Here are a few ways you can finance your fix and flip.
1. Home Equity Line of Credit
A home equity line of credit resembles another credit card more than a traditional loan. Your bank will issue you a line of credit based on the value of your home or property.
Rather than taking everything out at once, you can use relatively small amounts at a time. For example, you might take out $1,000 initially to update the exterior, then $5,000 later for a bathroom remodel — and eventually $10,000 for a kitchen redo.
You’ll pay interest only on the amount you’ve taken out. This is an especially attractive option in the case of slow renovations. If you go this route, you won’t have to pay interest on a portion of the loan you haven’t yet withdrawn and spent.
2. Traditional Bank Financing
Although many house flippers are skeptical about using traditional bank financing, that can be an option as well. Experienced flippers tend to avoid it because, sometimes, interest rates can be higher for a traditional loan or there might be a penalty if you pay it off early.
Traditional financing also hinges on your own personal credit score and debt ratio. Even if the purpose is closer to a business loan than a personal one, some financiers are hesitant to offer a loan to applicants who have an existing mortgage.
However, if you feel more comfortable going for traditional financing and you qualify, this might be a preferable option. Discuss the matter with a trusted banker to see if this could be the right fit for your situation.
3. Hard Money Loan
Hard money loans are designed specifically for people who either don’t have great credit or plan to repay the loan in a short while — usually within a year or two. It’s much easier to qualify for these, and you can get the money quickly — generally in less than 15 days.
This is a great option if you’re certain you’ll make a quick profit on a property, but it comes with its own set of risks. Rates are higher for such a substantial loan; they typically start at 7 percent or more.
You’ll also be expected to repay at the agreed-upon repayment date, even if your investment property hasn’t sold yet.
4. Personal Investors
If you have financially stable family, friends, or personal investors who support what you’re doing, you might consider peer-to-peer lending. You can solicit one or multiple vendors to put up the cash for your flip.
You’ll either pay them a certain interest rate or promise them a percentage of the profits. This can be a great way to finance your flip, but it’s difficult to find investors willing to put up this kind of cash.
You usually need a steady track record of successful flips before investors will place their trust and money with you.
5. Cash-out Refinance
If you already own property, a cash-out refinance might be an attractive option. This involves refinancing an existing property to purchase your new investment.
You can take out a new loan slightly above the value of your current property. The new loan will pay off the original mortgage, and, depending on the equity you’ve built into the existing property, you’ll have a little extra to put toward a new property.
Essentially, you’ll get the difference between the new loan amount and the old mortgage. This can be a great option because rates are typically lower than the traditional mortgage, but this is only available to those who own property already and have substantial equity.
Real estate crowdfunding platforms are growing in popularity as a new way to provide investors with financing for their fix-and-flip projects. They work by collecting a series of large or small investments to put toward a large project.
Investors make money either by collecting interest or sharing the profits. Crowdfunding real estate can be a risky venture, primarily because it’s fairly new and doesn’t have a consistent track record. Still, it might be worth researching, particularly if you’ve struggled to find financing elsewhere.
7. 401k Loan
If you’re contributing to an employer 401k plan, you might have the option to take out a loan against your principal. Usually, you can get a loan worth 50 percent or $50,000 of your holdings, whichever amounts to less.
This can be advantageous for you because, rather than paying interest to a lender, you’re paying it to yourself. Not all employers will allow this type of loan, however, and it can be risky if your flip flops. You might have to dip into your 401k holdings to pay it off.
Every loan option for a successful flip has potential pluses and minuses. Once you’ve defined the loan option that looks best for you, find the perfect property and keep expenses low to make a profit!
Which one of these finance options is your favorite?
Share your experiences and opinions below!