Funding a flip comes with a ton of misconceptions. For years, I didn’t move forward buying a flip because I had the belief that there was only one way to purchase a house and renovate it, and that was if you had cash available.
While that may be the ideal situation, there are several other ways! Especially when you’re getting started and trying to build your profits, it’s essential to know all the options you have can access. The one thing I can say with absolute certainty after more than 150 flips? You should never just have one of anything when it comes to flipping.
Last week, we tackled finding a flip, but once you find a house, you need to fund it. Funding is one of the least covered topics when you watch flipping shows on TV. Along with a few other things that are often left out, there’s more to buying flip projects than making a phone call, especially when you’re just getting started.
This week, I’m going to review a few of the most widely used options when it comes to funding your flip. You’ll be able to see the details and the steps to access each, as well as the situations where they may be most helpful.
The critical thing to remember is that you will have new funding opportunities and better rates as you progress and complete more projects. But first, you need to get started!
If you’ve been struggling with looking 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 your profit that I discuss here that may help with your decision process.
Five Types of Fix and Flip Loans to Fund Your Flip
“Fix and Flip” loans are a unique type of loan that investors use to secure the property and cover the renovations.
Hard Money Loan
If I had to name one type of lending that changed my business, it is hard money lenders. With that being said, I had completed several flips before I started to use this loan type.
Hard money loans are non-bank loans from private investors and individuals. These lenders have lower qualification requirements and can provide funding for flips in just one to two weeks.
When I started, hard money lenders weren’t an option (they didn’t even exist). Now, various private business loan lenders and online platforms specialize in hard money loans for fix and flips.
Since hard money lenders work with less qualified borrowers, they charge higher interest rates at around 10% – 20%. Plus, these lenders have fees that can increase the total cost of the purchase, so you need to account for that when analyzing your project. Therefore, it’s better to consider more affordable options before a hard money loan.
Hard money loans are designed to “tide you over” until you complete the renovations on your property and sell it. As a result, the average hard money loan has a one-year term, although extended options are available. These loans also require a relatively small down payment (usually just 10%) because the lender cares more about the property’s potential than the borrower’s background.
Moreover, hard money lenders are pretty hands-on once they approve your loan. They generally extend the loan in parts. First, they’ll give you the money for the home purchase and the first set of renovations. Once the contractor completes initial renovations, you’ll get the money for the next stage of renovations, and so on.
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 need to be at least 20% equity in said home.
Using the equity in your personal residence can give you access to funding for flipping. You will draw money as needed and pay interest on only the money that you use. HELOCs typically offer favorable interest rates. There’s a lump sum amount, whereas, with a line of credit, you can borrow up to the limit as needed.
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 pay off the HEL or HELOC.
Most banks will let you borrow up to 85% of the value of your primary residence, minus your outstanding loan balance.
For example: If you have 30% equity in a 300,000 house, 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.
Using a 401(k)
Yet another option for financing your fix and flip is to take a loan or withdraw funds from your 401(k) account. These fix and flip loans are best for house flippers who have retirement savings either through an employer 401(k) or another 401(k) plan and don’t need the funds for an upcoming retirement.
Using your 401(k) isn’t a good choice for someone approaching retirement, but it can be a great option if you have a few years before you need the money for retirement. 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 401(k) accounts let you take a loan of up to 50% of the account balance, or $50,000, whichever is the lower amount. Solo 401(k) plans for self-employed individuals also allow loans of up to $50,000. You do pay interest on the loan, but the money is yours, so you’re paying back the principal and interest to yourself.
This fix and flip financing option are best for transactions where the seller doesn’t mind structuring the sale unconventionally. Seller financing also called owner financing, is when the seller of the home acts as the lender.
Instead of taking a mortgage from the bank or a lending company, you ask the seller to finance the fix and flip deal. Most homeowners want the money from the sale of their house right away. However, it doesn’t hurt to see if the current owner is interested in seller financing, especially if they’re eager to sell the home quickly.
Seller financing offers advantages to both the owner and the flipper.
For example, let’s take Sarah Seller and Bob Buyer. Sarah is retiring and selling her fixer-upper for $100,000, and she agrees to extend a loan to Bob. They agree on a down payment of 5%, a 4% interest rate, and a maximum term of six months. Bob gives her the $5,000 down payment now and a promissory note for the remaining balance. He pays interest monthly.
Bob spends $25,000 renovating the house and sells it for $150,000. After selling the home, Bob pays Sarah $95,000 balance and the remaining interest. He also pays his contractors for the renovation. Accounting for interest and the cost of renovations, Bob made nearly $24,000 in profit. Sarah is happy, too, because she got a nice return on the proceeds of her sale.
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. The borrower either has to sell the property or get a new loan to pay off the seller by that day.
As with partner financing, you should have the terms of an owner financing deal in writing. Since the seller here is a third party (not someone you know, as is typical with partner financing), it’s wise to have a lawyer draft up the loan papers.
Business Line of Credit
The final type of fix and flip loan is a business line of credit. This 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 bank financing can open up. As mentioned, traditional bank loans don’t work well for fix and flip funding. However, business lines of credit offer investors funding for house flipping.
With a business, or commercial, line of credit, you get access to a specific amount of money but only pay for what you use. Thus, making a business line of credit ideal when you’re unsure how much renovations will cost on a property or how long a renovation will take.
Business lines of credit work like a HELOC, but the difference is the amount of money at your disposal. 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.
You can apply for a commercial line of credit at your local bank. Bank of America, Chase, Wells Fargo, and smaller community banks all offer small business lines of credit. The interest rates on these are very low, but remember – To qualify for a commercial line of credit, you’ll need to have an excellent credit score (above 700), a decent amount of money in the bank, and a stable history of revenue.
Anyone with access to money can be a private lender. The flexibility of being able to work with this type of lender is as close to cash as you can get. The terms and cost of the loan can be negotiated and there’s no formal approval process. This lending is also easily combined with other methods discussed above to purchase properties without having to fund any of the purchase or renovations yourself.
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) and cash advance were to fund the renovations. It may not have been pretty, but that first project yielded a $27,000 profit. I share this as an example of how creativity is more profitable than waiting for the perfect funding plan.
Ready to take the next step and get flipping?
Here are some resources I’ve put together 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.
If you are interested in learning more about the House Flip Blueprint course, go here!
There are several videos available on finding houses, renovations, and funding on YouTube. Check out your favorite flipping topics and new videos weekly.
Ready to take that next step when it comes to flipping?
Perfect! I’ve got 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.
You can’t close a successful and profitable flip unless you start. What is your biggest challenge with getting started house flipping? Let me know. It may be an area I’ve also had questions about myself. I’m here to help so drop me a DM.
Want to buy a property and renovate it?
Get my checklist that will help you — 8 Things I look for When Purchasing a Home. Just click here to download it.