Those TV house flipping shows that feature average blue-collar workers and professional designers make flipping look fun. But, those shows don't go in-depth on how to get started in the business, especially with financing. Here, we'll show you how to cover your flipping costs.
Both a home equity loan and a home equity line of credit are financial products that are secured by your home. If you default on both products, the lender could foreclose on your home. The amount you can borrow depends on your home's value, but you can't go over 85% of its total.
Home equity loans have fixed interest rates and monthly payments. A Home equity line of credit acts similar to a credit card in that the debt is revolving. Equity lines of credit have variable interest rates (can change month to month) and may be subjected to closing costs or fees.
Typically a house flipper will take out a hard money loan if they don't qualify for traditional financing, but not always. Hard money loans are traditionally only used in real estate transactions, where the underlying property or another existing property is used as collateral.
Hard money lenders understand the real estate market, making it easier for you to secure financing for a house flip. An optimal credit score isn't necessary, but that also means your loan will come with a higher interest rate and fees. Click here to find a lender near you.
An unsecured personal loan gives flippers the ability to use their funds for any purpose. As long as you have a high credit score, banks won't care why or how you use your personal loan.
House flippers will take out a personal loan after they've successfully flipped several properties because your income also determines the amount you receive on your loan. If you can't secure enough on one personal loan, you may need to get more to cover your project.
Getting a personal loan is quick and easy. Plus, you'll have access to low-interest rates.
Tapping into your retirement funds to finance your flips can be a good option, though it has a number of downsides. Still, approval is easy, and your annual interest rate will be low.
After all, you're borrowing your own money, so you're taking from what you've already earned. The penalties you incur from this option are determined by your 401(k) loan agreement, but you're likely limited to what you can take out. You're also jeopardizing your retirement.
If your 401(k) is tied to your employer, you may need to repay your loan in full if you're fired.
Seller financing is when a real estate buyer has a loan agreement directly with the seller of the property. If you're having a hard time getting a loan from a traditional institution, the seller can agree on a downpayment and help each other receive financing for your house flip.
Although seller financing has a fast, cheap, and simple closing process, you may pay a higher interest rate. If the seller doesn't agree to help you with financing, then it's off the table.
Your friends and family may be able to help you with your projects. If they want to get a cut of what you earn, you'll have an easier time convincing them to loan you thousands of dollars. Plus, you'll usually avoid costly fees, interest, and the hoops banks make you jump through.
However, money and relationships don't mix well. Treat this loan as similar to a bank loan. Don't expect your family to bail you out or resolve your debt, as it may cost you your relationships.