Thinking about trying your hand at flipping houses? But you don’t have nearly enough cash to buy a second property right now?
Most flippers started out in that same situation. There’s a good return to be made on flipping houses, if you do it well, but how do you get financing to flip a house?
There are six general types of “fix and flip” loans for flipping houses. Each has pros and cons, but finding the right option could launch you into the career of your dreams.
1. Hard Money Fix and Flip Loans
A hard money loan is a loan that is secured by real estate. They are provided by specialty, privately-owned lending companies, so they’re not subject to the same lending requirements as traditional banks. This gives the lender more flexibility, which is often good news for borrowers who can’t get—or don’t want to deal with—a traditional loan.
Hard money loans vs. conventional loans:
|Hard Money Loans||Conventional Loans|
|Provided by||Private investors||Government-regulated institutions|
|Duration||6 to 18 months||15 to 30 years|
|Interest rates||10 to 18%||2 to 4%|
|Purpose||Short-term investments||Long-term residence|
|Security||The property in question||The borrower’s personal credit and property|
|The application takes …||1 to 2 days||2 to 4 weeks|
|You get funds …||Within a couple days||In about 30 days|
|Qualification requirements are …||Flexible||Set and regulated|
|Construction draws||Common, 1 to 4 days||Uncommon, 7 to 14 days|
New flippers often experience some initial sticker shock at the high interest rates on hard money loans, but when you consider the short life of the loan it makes sense. Hard money loans are often ideal funding options for a fix and flip project, because lenders have more freedom with qualification and loan terms and because funds are available much faster.
There are some nation-wide hard money lenders, but most flippers find they are better served by a local partner. A hard money lender in your state will have knowledge of local markets and will probably know a network of contractors and realtors, which makes them a very strategic partner, especially for new flippers.
This is not a GoFundMe page. Crowdfunding for fix and flip loans happens through a few special organizations and websites that have been established for this specific purpose.
They function like other crowdfunding sites in that many people can invest varying amounts from across the country. And they function like hard money lenders in that the interest rates are high, but the lender has much more flexibility than traditional banks.
There are a few drawbacks to speciality crowdfunding sites to keep in mind, however:
- The interest rates can be even higher than many hard money lending groups, with some as high as 26%.
- Closing may take longer than other hard money lenders. Some sites will finance your flip up-front, but others wait until the actual investments have come in.
- While the terms are usually more generous than traditional lenders, crowdfunding sites can’t always be as flexible as other hard money lenders because they’re representing a large group of investors based on pre-existing terms.
3. Private Lenders
A private lender is simply an individual with enough personal resources to invest in your flip. It might seem fanciful, but they really are out there.
Private lenders are also essentially offering hard money loans. They charge similar interest rates and are similarly flexible with terms and qualifications.
The difficulty of working with a private lender, especially for a new flipper, is separating the investors from the scam artists. There are those who will bury terms in a contract and then try to catch the lender in default in order to foreclose on the property, or bring unexpected fees to the settlement.
Even the most well-intentioned individual lenders can be a little riskier to work with. Some just default themselves and fail to provide funds, for a variety of reasons. And they’re more likely to run out of investment funds if a personal situation arises.
The best way to vet a private hard money lender is to talk with other flippers about who they have worked with.
4. Home Equity Loan (HEL) or Line of Credit (HELOC)
A home equity loan is based on the equity of your primary home and uses that home as collateral. Equity is the market value of your home, minus the balance of your mortgage.
Both a home equity loan and a home equity line of credit function as a second mortgage. You pay off the loan amount in monthly installments, at a fixed interest rate. A loan provides all the financing in one lump sum. A HELOC allows you to borrow as needed, up to the approved limit.
You need to have more than 20% equity in your house in order to qualify for a home equity loan, or line of credit. Most banks will let you borrow 80 to 85% of your home’s equity, minus the balance of your mortgage.
If you have 35% equity on a $200,000 home, for example, that means you still owe $130,000. If a lender allows an HEL on 80%, that means you could get an HEL or HELOC for $30,000. ($200,000 x 80% = $160,000 – $130,000 = $30,000)
All of this means there are a few challenges to using a home equity loan or a HELOC to finance your fix and flip:
- You have to be a homeowner.
- You need to have more than 20% equity in your home.
- Unless you have a lot of equity in your home, an HEL or HELOC won’t provide a whole lot of funding.
- You need to make enough money to pay your mortgage as well as the monthly HEL/HELOC payment.
- You’re gambling your own home as collateral.
It’s a risky business for not much gain. Because it’s coming from a traditional institution, you’re also back to longer application processes and longer closing delays
The interest rates are lower than hard money options, and some flippers have had good luck with home equity loans. But it may be too much risk for new flippers.
5. Cash-Out Refinance
A cash-out refinance is a new mortgage on your home, for an amount higher than what you currently owe. The difference is paid out to you in cash.
Most banks limit the cash-out at 80% of your home’s value, and you generally need more equity—30 to 40%—than a HELOC.
The difficulties and risks of a cash-out refinance are similar to other home equity options. And because the mortgage is being refinanced, you’ll have to pay closing costs too.
6. Acquisition Line of Credit
An acquisition line of credit is a financing option designed specifically for purchasing real estate. It works very much like a HELOC, except that it does not depend on the equity of your home.
Acquisition lines of credit are approved based on the borrower’s proven history of owning or flipping properties, and overall “financial wherewithal.” So while an acquisition line of credit can provide access to millions of dollars for real estate investments, it’s generally out of reach for many new flippers.
How much does it cost to flip a house?
The question is, then, how much do you need? The cost of flipping a house is more than just the purchase price plus repairs. There are five types of costs to prepare for:
- Purchase price — This includes the asking price, but also closing costs, realtor fees, inspections, etc.
- Upgrades and renovations — Experienced flippers can make some good estimates by just walking through a house, but if you’re new, start researching numbers before you look at any houses. Make sure you have a rough idea of what flooring costs per square foot, etc.
- Carrying costs — These are essentially the costs of owning the property while you’re renovating it, and include expenses like utilities, taxes, insurance, and your monthly loan payments.
- Selling costs — If you decide to sell the home yourself, there will be costs associated with marketing the property. If you use a realtor, there will be realtor fees.
- Project cushion — No estimate is perfect, and failing to provide some cushion in your budget can be a disaster. There will be some added expense or some unforeseen delay, so plan for it. A good rule of thumb is to add 15 to 20% of your renovations estimate.
How to get a hard money fix-and-flip loan
Because hard money loans allow for so much freedom and flexibility, every lender has different requirements and applications. In general, the process is much faster and much more simple than applying for a traditional mortgage.
Start by finding the right lender. Private lenders—small groups like Loan Ranger Capital or individual investors—provide the best service overall, because of the lending experience and professional assistance they can offer. For the very best hard money loan experience, find someone in your area, especially if you’re new.
If you’re in Texas, you don’t need any kind of minimum credit score and you don’t need to pre-qualify for our hard money fix and flip loans. Our online application process is quick and easy, and you can be approved in less than 24 hours.
Financing for your fix and flip
There are more expenses involved in flipping houses than many people realize at first, but you don’t need to have all the capital for purchasing and flipping a house to get started. Even if you do, it’s a good idea to look for financing in order to minimize your own risk.
As you start to pull together numbers and documents to apply for financing, consider, first, whether you want to work with hard money or a traditional lender. If you have a good relationship with your bank, aren’t in much of a hurry, and have some cash set aside, a traditional bank might work for you. If you need cash-on-hand quickly and/or are interested in working with a flexible partner, a hard money loan is the way to go.