How to fund a flip is an area that can trip people up when it comes to house flipping. For years, I didn’t move forward buying a flip because I believed there was just one way to purchase a house and renovate…cash. While that may be ideal, there are definitely other ways to do it. When you’re just starting out and trying to build your profits, its important to know all your options you may have access to. One thing I can say with absolute certainty is that you should never just have one of anything when it comes to flipping, and that includes lenders.
What’s Different About Fix and Flip Loans?
Last week we looked at How to Find a House to Flip-Step by Step Plan to Find a Profitable Flip but before you find a house you need to know how to purchase it. If you’re a fan at all of house flipping shows you’ll know the money part is one of the least covered topics when you watch flipping shows on TV. Not every flip purchase happens as easy as making a phone call or bringing an envelope of cash to the courthouse. That’s why you need to know what kinds of “not-typical” loans and options are available.
How to Fund a Flip: Funding Options You Need to Know About
This week I am going to dive into a few of the many options when it comes to how to fund a flip. Not all of these will work for everyone but knowing about them is key. Remember, as you progress and complete more projects you will have new opportunities. Those may include new lenders, new programs and more favorable rates. But you can’t get to the point where people want to fund your flips unless you get started.
If you have been struggling with how to look at profit vs. risk when it comes to house flipping and that has been keeping you from looking at funding options, there are different ways to look at a profit that I discussed here https://thresholdhomesmn.com/looking-at-profit-when-house-flipping/ that may help with your decision process. What ever type of funding you choose, make sure to account for any fees in your profit analysis.
What’s Different About Fix and Flip Loans?
Fix and flip loans are a unique type of loan that investors use to secure the property and also cover the renovations. There are several types but here we are going to cover the following:
- Hard money loan
- 401(K) Loan
- Seller Financing
- Business Line of Credit
Five Types of Fix and Flip Loans to Fund Your Flip
1. Hard Money Loan
If I had to name one type of lending that absolutely changed my business, it was using hard money lenders. That being said, I had completed several flips before I started to use hard money lenders. To be honest, when I started, hard money lenders were not even an option since they didn’t exist.
- Hard money loans are non-bank loans from private investors or individuals. They typically offer lower qualification requirements and can provide funding for flipping houses in just one to two weeks.
- The trade off for access to quick and easy funds are the higher interest rates and fees. Some may be in the neighborhood of 10% to 20% so make sure to shop around. Plus, these lenders have fees that can increase the total cost of the purchase so you need to account for that when you are analyzing your project.
A variety of private business loan lenders and online platforms specialize in hard money loans for fix and flips. They can be found by doing a simple Google search for “hard money lenders” and your market.
2. Home Equity Line of Credit
This loan is an option for people who want to fix and flip and already own their own home. For this to work, there would also need to be at least 20% equity in the home that is owned. Using the equity in your personal residence can provide funds for flipping. The money can be drawn as needed and interest paid on only the money that you use. HELOCs typically offer favorable interest rates and the amount is available in a lump sum.
Equity is the difference between the market value of your home and the amount owed on the mortgage. To qualify for a home equity loan or line of credit, you should have at least 20% equity in your home, ideally more—depending on how much you want to borrow. You should also have good credit and enough monthly income to afford your mortgage payments and the HELOC payment.
Most banks will let you borrow up to 85% of the value of your primary residence, minus your outstanding loan balance. For example, let’s say you have 30% equity in a $300,000 house. That means you still owe $210,000 on your mortgage. A bank would extend you a maximum loan or credit line of around $45,000. If this isn’t enough money to complete your fix and flip project, you can combine this funding option with other financing methods.
3. Using a 401(K)
These fix and flip loans are best for house flippers who have retirement savings either through an employer 401(k) or another type of 401 (k) plan and do not have an immediate need for them. You may also be able to take a loan or withdraw funds from your 401(k) account. Taking a loan from your 401(k) might be a worthwhile option, and one I used myself when I was working full-time and flipping 3-4 houses a year. Most employer accounts allow a loan of up to 50% of the account balance, or $50,000, whichever is the lower amount. Interest is payable on the loan, but the money is yours, so you’re paying back the principal and interest to yourself.
4. Seller Financing
This fix and flip financing option works best for when the seller doesn’t mind an unconventional sale. This is also called owner financing. This strategy is when the seller of the home acts as the lender. As a buyer, instead of getting new funding you ask the seller to finance the fix and flip deal. While many homeowners want the money from the sale of their house right away, some may not. It never hurts to ask to see if there is any interest in the seller financing the purchase, especially if they’re eager to sell the home quickly.
Seller financing offers advantages to both parties. Here’s an example, you have a seller and a flipper. The seller wants to sell her house “as-is” and its a fixer-upper. She’s asking $100,000, and she agrees to extend a loan to the flipper. They agree on a down payment of 5%, a 4% interest rate, and a maximum term of six months. The flipper gives the seller a $5,000 down payment now, and a promissory note for the remaining balance. The interest is paid monthly.
The flipper spends $25,000 renovating the house and sells it for $150,000. After selling the home, the flipper pays the seller the $95,000 balance and remaining interest. The flipper also pays his contractors for the renovation. Accounting for interest and the cost of the renovations, Bob made nearly $24,000 in profit. The seller is happy, too, because they got the asking price for their house. They just had to wait until the flip was complete.
Usually, the flipper makes interest-only payments until they sell the property, at which point they pay off the seller in one lump sum. The seller can set a “balloon date,” a specific date by which the borrower has to pay back the loan. By that day, the borrower either has to sell the property or get a new loan to pay off the seller.
The terms of an owner financing deal should always be in writing. Since the seller here is a third party (not someone who you know), consider having an attorney draft any documents.
5. Business Line of Credit
This fix and flip financing option is best for experienced flippers with a history of successful deals and regular income. Once you’ve been flipping properties for a while, the possibility of working with banks increases.
While traditional home loans don’t work well for fix and flip funding, a business lines of credit offer can offer investors another option. With a business, or commercial, line of credit, you get access to a specific amount of money, but only pay for what you use. Business lines of credit work like a HELOC, but may offer higher limits. Commercial lines of credit can go up to as much as seven figures, based on your business’s income and your portfolio of fix and flips. The interest rates on these are lower than other options but they also require a strong credit score, other liquidity and stable business revenue.
Funding My First Flip
Back in 2007, I had to piece together the funds for my first purchase. After being turned down by several banks, I used a traditional mortgage, a 401(k) loan and a cash advance from a credit card. The mortgage covered the purchase and the 401(k) loan and cash advance were to fund the renovations. It may not have been pretty, but that first project yielded a $27,000.00 profit. An example of how creativity is more profitable than waiting for the perfect funding plan.
In this video, I’m talking about the different types of loans and where each can be used to in your flipping. One of the most important pivots in my business happened once I started to incorporate new funding into my business.
Ready to take that next step when it comes to flipping?
Now that you know how to fund a flip, here are some additional resources to help you get the information you need to move forward on creating your flipping life.
Make sure you have the Fixer Upper Checklist so you know which areas are key to added value in a home.
There are several videos available on finding houses, renovations, and funding on the Threshold Homes YouTube Channel. Check out your favorite flipping topics and new videos weekly.
Check back next week as I walk through the process of starting the renovations. Even if you have zero construction experience (like I did) it’s possible to make the right renovations and create a home that buyers want. What you do and don’t do can impact your profit so don’t miss it!
Want to buy a property and renovate it?
I have a freebie checklist that will help you — 8 Things I look for When Purchasing a Home. Just click here to download it.
Love before and afters?
Looking to buy a house to renovate? Check out the fixer upper checklist to help you find the house with the most “flip” potential.
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