House flipping… popular TV shows make it look like such a fancy process without talking about the potential requirement(s) of a loan to flip a house.
They often portray it as an effortless way of making a hefty amount of money in a matter of weeks. While the earning-a-great-return part is indeed true, what many real estate investors don’t realize is that it requires a heavy investment in the first place, and only when they have already decided to take the plunge.
Buying a property, renovating it and then selling it for a good profit is undoubtedly a great way to ensure a steady stream of income. A study conducted in 2017 reveals that real estate investors flipped more than 200,000 properties with an average profit of about $68,143 per house.
These whopping figures are proof of the rising popularity of house flipping.
Do You Have Enough Capital for Flipping Houses?
If you are thinking of investing all your personal savings and hoping for the best, you better drop the idea right away!
Despite being potentially profitable, house flipping can also be very risky. When the odds aren’t in your favor, things may not exactly go the way you have planned.
You wouldn’t want to see yourself drowning in debt now, would you?
This brings us to the core of this post: getting a loan to flip a house. Luckily, there is more than one way to get your hands on the cash required to flip a house. So, start taking notes!
1. Traditional Bank Loans
Typically, the first place real estate investors consider taking a loan from is their local bank. If you have experienced taking any kind of mortgage loan, you would have an idea of the entire process.
When it comes to conventional bank financing, you decide the duration of the loan term and put up an appropriate mortgage payment while the bank hands over the cash for the property. That being said, you continue to pay the mortgage payments until the house is renovated and sold.
Sounds too good to be true?
Well, to a certain extent, it is! Getting a loan to flip a house from the bank isn’t always a piece of cake because house flipping is seen as a risky investment. Moreover, you may not qualify for a loan if you have bad credit. Some banks may want to see your track record of successful house flipping.
A key consideration is that the property you intend to flip must be habitable for your local bank to give you a mortgage on the property. Typically, this means the bank will expect you to live in the property yourself.
If you don’t plan to live in the property, and you don’t run a commercial real estate business, there are several other ways to get financial assistance for your house flipping project.
2. Private Loans
If your bank doesn’t approve your request for a loan, don’t be disappointed! There are tons of private investors and money lenders out there who may want to offer you a loan to flip a house. Should you wonder why they would be interested in doing that, let’s remind you that successful house flipping tends to offer large, consistent returns on investment. If you know how to do it right, it can generate an ROI of 8-12% in a very short period of time.
Just make sure you have the following things to convince a private lender to give you a loan:
A Compelling Deal. This refers to a document that lists the terms of the agreement between you and the private investor. The deal must show clear positive investment value with conservative growth assumptions.
Hazard Insurance. You want to offer the lender an additional layer of security by taking out insurance on the property.
Deed of Trust. This document serves as a connection between the investment of the private lender and the house purchased. A Deed of Trust means you actually own the property — if you own it then you have the legal authority to put it up as collateral for a loan.
Needless to say you have to pay the investor back when the deal is sealed. You get two options to choose from when it comes to returning the money – you can either go for a monthly or accrued interest. The latter refers to you paying the lump sum of interests added over months after the property is flipped.
That being said, this is an excellent option to get a loan to flip a house if you are short on cash to begin with.
3. Home Equity Loan
If you’ve built in your house, it can provide you with yet another option of getting a loan. A home equity line of credit is basically a second mortgage that involves repaying the loan with a fixed interest rate
over a pre-decided period of time.
Although a home equity loan usually has a variable rate, it allows you to draw cash against your credit line whenever need be.
On the downside, however, your house serves as the collateral in the house flipping process. Thereby, if you aren’t able to keep up with the home equity loan, the bank reserves the right to foreclose on your house.
So if you are thinking of paying off your loans with the profit earned from house flipping, it might not be a smart move.
4. Hard Money Loans
Consulting with a hard money lender is another easy way to get a loan to flip a house. These private lenders have either their own money bank or a money pool collected from other people to lend to real estate entrepreneurs. The best thing about getting a loan from hard money lenders is that they don’t necessarily require you to have a good credit history.
Hard money loans are short-term loans that you need to pay off typically within a year or so. This serves as a last resort if conventional financial institutions have turned you down. While it is easy to qualify for these loans and they get funded very quickly, the penalties associated are often very strict — up to and including losing the property completely.
More on the not-so-bright side, these loans tend to have higher interest rates. This along with the short payback period will pressure you to sell your property flip as quickly as possible.
5. Crowdfunding Sites
Another commonly used option for getting a loan to flip a house is to use the real estate crowdfunding sites. Several people invest money in real estate projects – and this sum essentially ends up funding your house flipping project.
The crowdfunding you use may determine whether your house flipping investments build up as equity or debts.
Debt crowdfunding involves investors buying into a loan or a portion of the loan. The loan terms typically range from 1-36 months while the interest rates vary from 8-14%. It is crucial to note that the crowdfunding site may charge an origination fee.
The investors get money on a monthly basis through the interest charged on the loan. At the end of the loan term, a lump sum of money is paid that covers the leftover interest as well as the principal payment.
When it comes to equity crowdfunding, investors buy a portion of the house being flipped. After the property is sold, you and the investors share the profits. Investors not only pay a significant amount of investment, typically at least $5000 but they also pay the fee depending on the crowdfunding site chosen.
6. Family and Friend Loans
When you’re looking for options to get a loan to flip a house, it is always a good idea to check if any of your family members, friends, or any personal acquaintance is interested in investing their money in real estate. This option works for both beginners and experienced house flippers.
This opportunity in particular is one of the greatest reasons why you should focus on building a wide and strong network of connections. The biggest advantage of getting a loan from family and friends is that they trust you and hence, are likely to charge much lower interest rates.
If you decide to take this path, you should first understand that there are certain rules for borrowing money from your personal connections. For one, you should want to get all the terms and agreements of the loan written on paper. Make sure you specify the interest rate and the payoff for the loan.
This note document will serve as much-needed protection for both parties. Secondly, you must follow all rules and regulations as per the IRS laws and security laws applicable to family loans.
If the only hurdle keeping you from flipping a house is the lack of capital, you have your answer! Get a loan to flip a house from any of the aforementioned sources and start preparing for your flipping deal.
Learn about 5 Traps to Avoid When Estimating Rehab Costs
The popularity of house flipping is ever-growing thanks to booming property prices and increased availability of financing. Learn more about house flipping here.
If you’re not sure which crowdfunding site to choose for a loan to flip a house, check out comparative reviews of some of the most popular sites here.