With countless reality television shows centered on house flipping, everyone wants to quit their day jobs and start fixing up and flipping homes professionally. Now, as much fun as house flipping sounds – and it certainly can be – it is not always easy. The most important thing to know is that you will not get very far without funding. If you want to be successful, the first step is get some serious financing, since you cannot buy and renovate a house without money. After all, it takes money to make money. Lucky for you, there are some financing options out there for a beginner looking to fix and flip their first investment property.
Get to Your Bank
The first thing that you want to do is head to your bank of choice. Getting a loan for your fix and flip home will be just like any other type of mortgage loan, which means that you will get to decide just how long that you want the loan term to be and then you will fork over whatever the bank wants for a down payment and then they will hand you the money. Easy, right? Maybe not. When a bank agrees to loan you money, they are investing in you, so they only want to work with you if you have good credit. They also may only agree to loan you money if you have a good track record of house flipping, which means that if you are a first-timer, you might not be getting a bank loan.
Turn to Your Friends and Family
While you definitely should not go into business with just anyone, you also should not discount going into business with the right people – even if those people happen to be close to you. The nice thing about family and/or friends investing in your venture is that they already believe in you (that is why they are investing), so you won’t have to jump through invisible hoops in order to get their loan. Plus, they will probably give you that loan with a much lower interest rate than a bank would. That said, make sure to make everything legitimate and get everything in writing. Trust us, both parties want to have all of their bases covered. Not only will you know that they are completely serious, they will know that you fully intend to make good on your fixing and flipping plan.
Already a Homeowner?
If you own the home that you live in and have built up equity in it, you might want to consider utilizing some of that money pool to finance your fix and flip venture. Basically, a home equity loan is the same thing as taking out a second mortgage, which is at a fixed interest that you then repay over a predetermined time period. The risky part? Using a home equity loan means that you are putting your own home on the line and if something goes wrong with your fix and flip project, the bank might decide to foreclose on your house. If you take this route, you might want to have a good chunk of cash saved up, just in case you fall back on your payments.
Get a Hard Money Loan
Don’t have any friends or family to borrow from and don’t have good enough credit for the bank? Look into getting a hard money loan. Hard money loans are nice, because if your credit is not so good, you can still get the money you need to make the necessary renovations to your investment property. These loans are short-term that generally have to be repaid within one year. Sound too good? There is, of course, a catch. Hard money loans tend to have sky-high interest rates – like, double digits – which makes them a pretty pricey option if you start falling behind schedule. With this loan, you need to make sure that you get the property purchased, fixed up and flipped within one year so you can avoid paying interest. You should aim to get the property fixed and flipped in six months – eight at the most. After all, the quicker you get the job done, the less time your house will be on the market and the more money you have a chance to make.
Pay Your Loan Back – Fast
If you’re unable to secure traditional financing, you’ll likely be borrowing on a very high interest rate. The longer it takes you to pay off your loan, the more you’ll pay in the long run. After the home is flipped, you have a couple of routes to take. The first: selling. Most fix and flippers want to put the house on the market immediately to make back what they put into it. While ideal, this move isn’t always the wisest. You’ll need to get your home listed, hire a professional realtor, and pay your loan no matter what – even if the flip hasn’t sold and is sitting there.
Some fix and flippers choose to rent out their new property, which can be a profitable long-term strategy. However, this route can be risky as well, as you’re going to spend quite a bit of time and money on screening and vacancies, and you’ll take on a great deal of risk as well. If you do decide to rent out your fix and flip, be sure to do your research and take advantage of all possible landlord resources before taking that first step, as it may take a few months before you’re able to pull in a steady rental income.
House flipping ventures can be rewarding, but be sure you know about the ins and outs of the process before securing financing.