Rising home prices and increased access to financing have made house flipping more popular over the past few years. Flipping a home is a fantastic way to make a great deal of money, as long as you know what you’re doing.
Of course, in order to get into the lucrative practice of house flipping, you’ll need to know how to raise some serious financing. Learning how to finance a house flip can be essential if you’re interested in taking this route to real estate riches.
What should you know about house flipping loans and how to secure them? Read on, and we’ll walk you through the basics.
House Flipping Basics
If you’re brand new to the concept of house flipping, there is a lot to learn. Buying homes, fixing them up, and then selling them at a profit can be a fantastic way to make a very large sum of money.
However, it takes a great deal of money in the bank to be able to do this kind of work. You’ll need more money to flip a home than you would need to simply buy a home to move into as you normally would.
Where does all this money go to?
Well, you’ll need the funds to purchase the property. But you will also need to ensure you can stomach the potentially expensive renovation funds and the high cost of property taxes that you’ll need to face during the duration of the fix.
You’ll also need to get a very solid homeowner’s insurance plan and pay the premiums on that from the day you purchase the property to the day that you actually sell it off.
The profits you will make on the home will also be cut down slightly by the short-term capital gains tax. Depending on your federal income bracket, this tax requirement could take anywhere from 10% to 40% of your overall profit.
That’s mighty steep!
So, if you’re starting out and have no money to invest of your own into your house flipping enterprise, it can be difficult to get going.
It’s essential that you learn the proper ways to raise financing to do this kind of work.
Difficulty Securing Loans
It can take a lot of work to secure loans for house flipping.
Back around 2005, just about anyone could secure a loan through a little bit of work. Ever since the housing crash, however, things aren’t so easy for those looking to scrounge up some buying cash. The events of the previous year haven’t made things much easier either.
There are many challenges you’ll face in order to get the funds you need to get started. Even if you end up qualifying for a loan with a down payment, it will require more of your funds to borrow for a flip than it will if you’re getting a new primary residence.
Perhaps justifiably, money lenders of all stripes see house flipping as a riskier enterprise than simply purchasing a home. They will be less eager to lend money to anyone who is purchasing a house for the purpose of flipping it.
One way to mitigate some of this concern is to present a personal history with home flipping.
If you have a long background of successfully flipping homes for profit, that will aid your reputation and help a money lender feel more secure and comfortable.
If you’re an inexperienced home flipper, or if you’ve never done it before, this is not going to help your case with a money lender.
Working With Risk
That isn’t to say there is no hope at all. Plenty of banks and money lenders will still work with inexperienced home flippers.
However, in order to make the risk worth it for themselves, they will charge much higher fees and interest rates. You’ll need to do some calculations and budgeting to determine how much these will impact your overall profit.
There are many different financing options that may be available when trying to flip a home. Understanding these various options can be beneficial when navigating the potentially difficult financial waters pre-home flip.
You can look into this complete guide for more information, though we’ll cover some basics below.
Hard Money Loans
One of the more popular ways to finance a home flip is through something known as a hard money loan. In some instances, a hard money loan may also be referred to as a rehab loan.
These are short-term loans that are intended for use for real estate purposes. In many cases, these loans are issued by private lenders as opposed to large financial institutions.
A hard money loan relies upon the property itself as a form of collateral. If a person were to fail to repay this kind of loan, the lenders could take possession of the property.
An individual or a group of investors are more likely to put up this kind of loan.
The terms of this kind of loan are typically shorter than that of traditional mortgages. They tend to be under a year, hovering somewhere around the six-month range.
However, they do have the ability to last for up to five years. The interest rates on these loans are higher than that of traditional loans as well, sometimes up to 20%. Points are also charged for additional percentages of the loan, charged as fees.
The down payments required for a hard-money loan are also quite different. They tend to be much higher than the down payment that would be required for other types of loans — another reason why your initial money on hand will need to be substantial.
Benefits & Risks
That’s not to say that hard money loans don’t come with a number of encouraging benefits. The process is much faster to get and secure these loans. There is little paperwork involved and a fast approval process from most lenders.
Hard money lenders tend to have fewer requirements than other lenders.
They don’t need to have a high credit score or a lengthy financial background.
As we mentioned, the home itself will often be used as collateral in this type of lending situation.
That means the risk of taking this kind of loan is very real. It’s best to look for hard money loans if you’re an experienced home flipper and feel secure about paying the money back.
Finding a Lender
There are many different places where one might find lenders interested in supporting you with a fix and flip loan.
You can look online to connect with a number of lenders, all of who have different terms and requirements. Doing a little shopping around will help you determine who might be best suited to your needs.
There are many mailing lists and databases online that you can dig through to find a lender that might be a good fit for you.
The more experience you have flipping houses, the better rate you’ll be able to secure from these lenders. Your credit score will also play a role in how a lender might look at your application.
Online lenders provide a great deal of convenience, as you can begin your financial discussions without ever having to leave your home. They also tend to be faster and more efficient than other types of lenders.
In many cases, you might be able to secure a loan from an online lender within a week or so’s time. If you’re in a hurry to close a deal, this kind of efficiency can be extremely helpful.
If you don’t want to look online, it can also be beneficial to look into real estate associations in your area.
While these associations might not allow as much room to negotiate, they do provide reassuring face-to-face communication. They will also know more about the local real estate market in your area and may be helpful in putting your home flip plan together.
It can take some time to connect with the appropriate lender. It’s important to start your research process early to ensure timely results.
Learning How to Finance a House Flip
If you’re looking to create a good amount of income for yourself, you may be considering flipping houses as a career. However, learning how to finance a house flip can require more work than many people initially realize.
The above will cover all the basics of affording a house flip, though you’ll need to do further research to ensure you feel prepared before starting.
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