Assuming you don’t have a pile of cash under your mattress to buy that house to flip, here are some tips on financing flip property:
- Hard money-lender: These are individuals in the market that finance investors/rehabbers for short periods of time (less than 1 year and typically for 6 months) for higher than bank’s interest rates or a large percentage of the flipping profit. They will generally take a creditor position against the property to protect their investment. Your closing costs will be lower as there is no bank involved to charge fees. If you chose to hold the property, you will replace the hard money-lender with a traditional mortgage. They can also make a great advisor for your first house flip.
- Construction loan: This is generally the best was to finance your flip to secure as you should be able to borrow not only the initial purchase amount, but much of the rehab costs also. Often you will need to contribute 5-10% of your own money and can then borrow 80-90% of the repaired value of the property. This method is typically easy to convert to traditional financing if you chose to hold the property. The initial construction loan also traditionally has lower closing costs.
- Traditional loan with flipper infusing cash: Many first-time flippers will make the mistake of using a traditional financing product to purchase the property. They will then spend their own money to fix up the house, waiting till it sells to recoup their cash investment. This method requires the flipper to have all the necessary funds available up front to not only rehab the property but to also hold it during the sales process. Then, if you decide to hold the property, you will no choice but to refinance to pull your cash out to continue doing other flips.
There are many other complex and interesting ways involved with financing flip property which are beyond a short blog post, such as: self-directed IRAs, credit cards (yes, many people do it!), limited partnerships, and borrowing against the cash value of your life insurance. Researching your different options for financing your flip in advance will make this process much smoother and should help you put more money in your pocket.