What’s The Best Way to Finance a House Flip?
If you’re a first-time real estate investor, you might be wondering what you need to know to get started. The first thing you need is some cash to finance your renovation project. Flipping houses can be an excellent way to bring in additional income. If you don’t already have cash available to you, there are a number of different ways you can get the money you need, from borrowing to loans for flipping houses to bank loans with great mortgage rates. This post will walk you through the different options for financing house flips and the pros and cons associated with each.
Borrow money from friends and family
One option to consider if you need some cash for a house flip is asking friends and family if you can borrow a certain amount. The advantage of dealing with people you know is that you won’t have to jump through hoops associated with credit approval and other scrutiny of your personal finances. Plus, they will probably offer you a lower interest rate than a bank or another type of money lender.
However, there is a reason that many people steer clear of mixing friends and family with financial matters. If things don’t go as planned, you risk damaging your relationships with people you love. And, depending on who you ask, they may feel entitled to a say in the rehab process - which may or may not be something you’d like to avoid. If you’re going to take this route, make sure you put everything down in writing from the start. That way, the individuals loaning you money have a concrete record of the amount borrowed, the interest rate, and the payoff schedule. This is the best way to keep things from going south as you’re working on your house flip.
Traditional bank financing
One of the first places people look for loans for flipping houses is their local bank. Applying and qualifying for a fix and flip loan from a bank is just like getting any other kind of mortgage loan. It involves making decisions on the terms of the loan, the amount of the down payment, and other details. If the bank agrees to the terms, they give you the cash needed, and you begin to pay them off when agreed. It’s a very simple way to go about securing a loan.
On the flip side, getting a bank loan can be difficult because they take a close look at all of your financial records. You need excellent credit to apply for a loan. And, the bank may be cautious about offering you a loan if it’s your first time flipping a house.
Home equity loan or line of credit
A home equity loan is basically the same as taking out a second mortgage. If you have equity in your home, you can use it to fund a house flip. The loan terms ask you to repay the loan over a fixed term with a fixed interest rate. A home equity line of credit, on the other hand, usually has a variable interest rate - but it allows you to draw more from your credit line as you need to.
The downside of using home equity to finance your house flip is that your home serves as the collateral. Basically, the lender asks you to put your house on the line in the event you aren’t able to pay back the loan. If you can’t make the payments on your home equity loan or home equity line of credit, they could decide to foreclose on your house. If you’re hoping to use your house flipping profits to pay off your loan, you could end up in a difficult financial position.
Hard money loan
Hard money lenders offer loans for flippers and real estate developers on different terms than banks. They are a great option for people who might not have great credit. You can still borrow the money to complete your renovations if you have a property that is likely to make a profit. These loans are short-term and usually need to be paid back within a year or so.
If you have had a hard time getting traditional financing for your house flip, you might want to look into hard money loans. However, there are some issues with this kind of loan as they usually come with high-interest rates. This means they will end up being a more expensive option. The shorter loan repayment terms mean that you’ll have to hustle to complete your home renovations and sell your property to avoid late payment penalties.
In sum
Most people who want to flip a house can’t finance the whole project with their own cash. If you can’t afford to pay for renovations without accepting some kind of financial assistance, all of these are good options to explore. It’s important to compare each option's short-term and long-term costs to make sure you find the best fit for you.