Are you new to the flipping business and in search of funding for flipping houses? TV reality shows make flipping houses look fun because all you’ve to do is buy a distressed home, renovate it then sell the property for value.
However, what these TV shows do not shed light on is the steps of starting a flipping business, costs, the dos, and don’t. Want to learn ways of getting funding for flipping houses?
1. Bridge Loans
A bridge loan is a form of financing that gives flippers and real estate investors the flexibility to borrow money. Also called bridging loans or gap financing, they are usually secured by collateral. The borrower can use his home or other assets as collateral.
Compared to conventional loans, the underwriting process for bridge loans is faster. In fact, you can qualify for a bridge loan and receive financing in a few days. This is why bridge loans are popular forms of financing real estate investments for flippers and real estate investors.
Besides using assets as collateral, borrowers must have at least 20% equity in their homes. What you need to know is that bridge loans tend to have high-interest rates and last between 12 months and 18 months.
2. Fix and Flip Loans
Another short-term loan that flippers and real estate investors can use to fund their investments is fix and flip loans. With up to 90% purchase and rehab costs, fix and flip loans can help flippers purchase and renovate a property before selling for profit. So, if you’re bidding on foreclosures and auctions and are in need of quick financing, then fix and flip loans can provide funds within the week.
Before you plunge into flipping, you need to budget. With a budget, you’ll be able to work out all your holding costs for 6 months while keeping money aside. The costs include lender payments, insurance, lender inspections, monitoring, and other costs. There is nothing worse than a real investor running aground financially because they failed to budget.
Besides quick financing, borrowers also enjoy flexible terms. This is because the loans are usually not tied to rigid structures, and processes like traditional loans offered by banks. For example, if a borrower is not able to qualify for a fix and flip loan, they can still work with a hard money lender
Lastly, fix and flip loans carry less risk unlike a traditional home loan backed by your personal property and credit worthiness. Since fix and flip loans are only backed by the property for which it‘s granted, if the worst happens, you won’t lose your home.
3. Family or Friend Loans
You can turn to your family and friends to lend you money for your real estate investment. This is true if your family and friends consider flipping houses an option worth investing in. By seeking family and friends‘ loans, you can avoid the many costly add-ons associated with borrowing money from banks.
One reason house flippers will opt to hire less qualified people is that they can hire many people at a lower cost. Basically, they want to hire lots of people to fill similar roles and spend less.
One thing you need to remember is that money and relationships do not go well. When you borrow money from family and friends, take caution as your personal relationship is on the line. If your flip flops and you don’t have money to repay your family and friends, what will you do? What if your family and friends get restless and demand you return their money before you sell the property for a profit?
To ensure your personal relationship remains intact, any money you borrow from family and friends should always treat it as a bank loan. This means laying out the terms in writing and abiding by them.
4. Unsecured Personal Loans
You can take out an unsecured personal loan issued on your creditworthiness. Once you’ve the funds, then you can use them for the intended purpose which is flipping houses. What determines whether you’ll qualify for an unsecured personal loan is your income and credit score.
The lender will use your income and credit score to assess your ability to repay the personal loan. This will affect how much you can borrow, the interest rate charged, and how long you can repay the money. If you have a high credit score and substantial income, you’ll receive favorable loan terms. The money you borrow differs from lender to lender but it‘s in the range of $1,000 up to $100,000+.
5. 401(K) Loans
You can tap into your 401(k) retirement fund and finance your flip. A benefit of using your retirement funds to finance your flip is the easy approval process. Unlike traditional loans, using your 401(k) allows you to borrow against your account.
Besides the benefit of borrowing against your 401(k) account, the repayment process is hands-off. This is because all repayments for the loan are usually deducted through payroll deduction. This means that you must be employed, reducing the benefit of falling behind on payments.
If you’re self-employed, you can use your solo 401(k) to secure a loan for your flipping business. Depending on the cost of your flip, the amount you can borrow is up to $50,000 which is enough to cover renovations but not the purchase of the property.
There you’ve it, five types of loans that you can use to finance your flipping business. To be successful flippers, you need to find the best loan option for your house flipping business. It could be bridge loans, fix and flips loans, or 401(k) loans. All the above options are available to you. Simply do your research to minimize the downsides.