So, a house flipper buys a house for $100,000 and puts $50,000 into repairs. With a sale price of $200,000, that’s $50,000 in profit. But where does the flipper get that initial startup capital? How do you have enough money to even get started?
It may not surprise you to know that most of these people don’t have the cash at hand.
Relying on your own cash isn’t a good idea, even if you can. When you invest your cash, you can end up backed against a wall; once you run out of money, you’ve got to make a move. And it can lead you to irrational decisions because you know all your money is tied up.
Luckily, there are a lot of options. Many loan types can help you achieve your dreams — and help others get the house of their dreams.
1. Renovation Loans
What is a renovation loan? A renovation loan provides money both for the cost of the property and the renovation itself. So, if you’re buying a property currently valued at $80,000 that needs $40,000 in repairs, you get a loan for $120,000. Renovation loans usually come with some conditions. You can’t borrow over a certain percentage of the current value of the property, you need to have the majority of the work done by a professional, and so forth.
Most banks won’t lend money for a property that can’t be moved into. They don’t want as-is properties because they worry that they won’t be fixed. Then, they’ll be responsible for managing and selling a house that can’t even be lived in. But a renovation loan is different. The bank knows that with renovation, the property will be livable. Often, the properties are in areas that need to be remodeled; there may even be grants for revitalization.
To get a renovation loan, you do need to show that the property can be valued higher with the renovations and repairs you’re doing. You also need to be able to show how you’ll afford the necessary repairs, in terms of a budget. You’ll need to get the property appraised and you’ll have to get quotes from real contractors about how much everything is going to cost. But you’ll be able to get a complete loan for your property.
It should be noted most renovation loans are for people living in the home, but this isn’t always true. You should make sure you’re looking at loans that are marked as being for investors. Like other types of loans, these loans can have very favorable terms if you have a good credit score. For many people, the renovation loan is going to be the first type of loan they will look for. But it may not be suitable for those who like to DIY a lot
2. Bridge Loans
A bridge loan can be used temporarily while a project is occurring. Generally, a bridge loan is intended to “bridge” the gap between loans. For flippers, this is very interesting.
Bridge loans are short-term. So, a bank could loan you money to purchase a home for 12 months. The interest rates are going to be much higher than usual and the payments will be, too. But, critically, the bank is going to be expecting you to sell within a year. So, the qualifications for the loan are likely to be lower.
A bridge loan means that you do need to sell the property quickly or you’re going to start bleeding money. So, it can be a little stressful. But it can also be an excellent way to procure short-term funding, especially if you know that you’re going to be flipping the house in a few months. Further, it also makes it easier for you to remain motivated to sell quickly. You aren’t paying a regular mortgage. You’re paying a short-term, high-interest mortgage that will be immediately closed out once you sell.
The biggest advantage to a bridge loan is it doesn’t have the requirements of traditional mortgages. They don’t need to see that you can hold the property for 30 years. They just want to make sure you can pay the loan now. They know that you’re going to be selling the house quickly, which means they’re probably going to recover their funds very quickly. So, because of that, they aren’t that concerned about your long-term viability.
Bridge loans are expensive. But they can be a very good option depending on what your current situation is and whether you’re going to be doing a lot of house flips. The more flips you do, the more likely it is that a bridge loan is going to be good. The faster you can do the flip, the less money you’re going to spend. Plus, you’ll be able to qualify even if the bank sees you’re currently holding multiple properties.
3. Hard Money Loans
Sometimes you can have a hard time getting funding for a flip.
For instance, if you’re new to flipping and don’t currently have a job, the bank might not see that you have income and may not want to give you a loan. This is a problem new people have. But even experienced flippers can run into issues if a bank doesn’t believe in the property. A property could have major problems you know that you can fix, but the bank is more skeptical about it.
Enter the hard money loan.
Hard money loans are loans backed with equity. The hard money lender can seize the property, much like any other mortgage lender. But the difference is that these are independent investors and independent investment firms.
They can make any decision they want. They can accept you even if your debt is too high, even if the property is too damaged, and so forth; they make their own decisions.
Hard money loans tend to be far more expensive and they are usually very short-term. You need to be able to pay them back. But for non-traditional borrowers, a hard money loan can be the only way. Hard money loans are almost always given out specifically to purchase investment properties rather than real estate to live in, because hard money lenders are interested in a cut of the profits that come from house flipping.
And house flipping can be very profitable.
But because anyone can be a hard money lender with enough cash, house flippers should also be wary of who they deal with.
4. Home Construction Loans
Let’s say you purchase something that’s essentially a teardown.
It’s also possible to purchase home construction loans. For a flipper, this is important in areas in which land is the expensive part of a property. If you’re flipping homes in California. you may have a $600,000 lot on which a $100,000 home resides.
It can be better to just knock that property down entirely and build.
But you’re a house flipper, not a construction company. Home construction loans are often given out by the home construction companies themselves, to build out a property to your specs. You can create a white box if you want (no additional features; easily modified by a buyer). You can also create a highly specific property tailored to a specific type of buyer, in homes of getting more money for it.
Home construction loans are good because they let you choose every aspect of the property that you’re going to sell. It’s going to be more expensive than doing it yourself, but if a house is a teardown, it may be the only answer. You shouldn’t dismiss teardowns in areas that have high property costs. In high property cost areas, the house is secondary, and you can complete a better flip by knocking it down.
And, of course, people are going to be more willing to purchase a brand new home, and more excited about seeing the home. Home construction loans also often have lower requirements for mortgages, because they can qualify their mortgages (or work directly with a local bank to do so), instead of you trying to go through a conventional lender. The real complication is that home construction tends to take far longer than flipping. But it’s often the only answer when there are major structural problems.
5. Lines of Credit
Once you’ve bought a property, what do you do? You might have additional expenses that you don’t want to come from out-of-pocket. But there are a lot of answers to this, largely in terms of lines of credit.
- HELOCs. Home equity lines of credit are taken out against the equity of the property. With home renovation loans, sometimes some of the money is offered as a HELOC. The advantage is you only pay interest on the money you spend on the line of credit and you have some flexibility. This allows you to invest more or less in the property depending on what you find that you need.
- Personal loans. A personal loan is usually harder to get than a secured loan because it’s not secured with the value of a property. But personal loans can be very useful because they’re so flexible. You can use a personal loan for any type of expense, including renovations. And while personal loans can have high interest rates, their interest rates aren’t nearly as high as credit cards. Additionally…
- Credit cards. A credit card can also be used for incidental purposes. But you will want to put that credit card in your company’s name rather than your own and you’ll want to avoid spending too much on it. Credit cards have the highest interest rate of all and they can accrue quickly. Pay off the credit cards once every job is done, before taking your profits.
- Store lines. Most hardware stores will give out a line of credit. This is valuable because you’ll be able to immediately purchase items like flooring, roofing, lumber, and more. Like credit cards, you should pay off the debt quickly. But unlike credit cards, you can often get deals, such as a 0 percent interest payment for the first 12 months, or discounts on the products you’re buying.
Lines of credit give you the flexibility to spend money when you’re doing the repairs. Since even a renovation loan has some requirements for how you spend your money, a credit card or store line of credit can give you more control over what you buy. This also helps you save money because you’re able to identify the cheapest options, thereby increasing your ROI.
House flippers will always need to be intimately familiar with funding options. But there’s some very good news. The more you get funding, the easier it will be to get in the future. When bankers can see that you’ve already had a ton of mortgage loans and paid them all back, they’ll start treating you as a serious business and as a serious buyer. If you already own a house and own your car, you’ll be far more likely to qualify for a renovation mortgage or hard money loan right off the bat.
It’s always possible that you’ll need to use alternative methods of financing at first, however, because you don’t have any history. Having a solid credit score and solid payment history before you try to get a loan will help. You want to be able to show that you’re reliable. You also want to be able to show that you have enough money available to pay off your current debts comfortably. Here, standard tricks apply; pay off all your credit card debts and close out all your personal loans before you start looking for bigger loans.
Are you ready to start investing? House flipping is a great way to make money fast — especially if you have your eye on eventually building equity. But it all starts with a loan. Contact Landmark Capital today to find out more about procuring funding.