Best Ways To Fund Your House Flipping Business - Private Lending Blog

Best Ways To Fund Your House Flipping Business

| Posted in General Lending

October 14, 2022

Deciding to start flipping houses can be a solid option for generating extra revenue, particularly if you are talented in home design or are handy with doing repairs without hiring someone. That said, it’s typically not as cheap as many people believe. You’re not just purchasing land and a structure; you’re also buying appliances and any repairs and remodels you can’t do by yourself. You’re also often left with a situation where you may be waiting on the sale before you can collect any profits. This process can sometimes take months or even years to complete. Luckily, there are several financing options out there for house flippers to research and decide what options may work best for their specific needs. Below we will look at a few loan options to get you from start to finish until you can start collecting revenue on your new flipping investment.

Commercial Loans

Commercial loans are loans secured by liens on a commercial property. If the borrower does not have a well-established financial track record or high enough credit rating, lenders may require the borrower to guarantee the loan. If a loan guaranty is not required, and the property is the only means of recovery in the event of default, it is a non-recourse loan. Lenders have no recourse against anyone or anything beyond the property. Generally, the longer the loan repayment schedule, the higher the interest rate will typically be. Commercial loan Interest rates tend to be higher than on residential loans.

Home Equity Loans

A home equity line of credit is secured by utilizing your primary residences equity when you own a home. You can often get financing at a low interest rate. Home equity loans are, as the name indicates, based on home equity.  Equity is calculated by taking the value of your home minus what you owe on the mortgage.

Investment Line of Credit

With a line of credit loan, you borrow against your investment property’s equity. The property serves as collateral to repay the loan in the event something goes wrong during the repayment process. To qualify for a line of credit loan, you will most likely need good to excellent credit, and a history of successful real estate investments. In general, you must own the property at least one year to be considered eligible for a line of credit loan. As a result, lines of credit loans are usually not the best option for first time house flippers as they have not established a successful track record of real estate investment yet.

Bridge Loans

Bridge loans are intended to cover the “gap” between when you want to buy a property, and when you can secure long-term financing.  As a result, these loans are sometimes referred to as “gap” loans. They can be utilized to help cover the down payments expenses on your next flip so you can focus on finding another financing option to cover the rest of the purchase amount. Bridge loans are generally secured using some form of collateral in order to qualify for a loan with a lower interest rate compared to other loan options out there. Bridge loans are often easier to qualify for than other types of loans which make them appealing to flippers who are just starting out.

Cash Out Refi

Cash out refinance loans make it possible for you to use an existing properties equity to fund your next house flipping project or to make any necessary repairs or remodels needed. Borrowers can use their own home’s equity to take out a new loan and pay off the existing mortgage, and then use any remainder to finance their flipping project. Typically, in order be cost effective, you will generally need to have accumulated at least 30-40% equity in your home in order for as cash out refi to be an effective solution for you.

Traditional Bank Loans

Traditional bank loans are mortgages with fixed interest rates. Bank loans are usually best for those buying a home to stay in for at least 5 years while renovating it to sell for a profit. With a traditional bank loan, you will generally pay a lower interest than with other financing options and have up to 30 years to pay back the loan which makes them ideal for primary residences.  In order to qualify for a traditional loan, however, you will need enough for a down payment, a solid credit score, and a stable income.  The fed has recently raised the rates on these loans in order to curb inflation which is making most real estate markets grind to a snail’s pace as they transition from a seller to a buyers’ market.

Hard Money Loan

With a hard money loan, you work with non-bank lenders, individuals or lending companies like the 1,000’s of companies in our free online nationwide directory at Hard money lenders often have less stringent eligibility requirements and you can often qualify even with little to no credit. These loans tend to have significantly higher interest rates, often with shorter repayment terms so it is critical to fully do your research before agreeing to the terms of any of these types of loans. That said, these loans are a great option for many investors and when used correctly can generate enormous gains in real estate revenue.

Whether you have been fixing up and flipping houses for decades or are interested in just getting started in house flipping to generate some extra revenue, try the above financing solutions to hopefully lay out less of your own hard-earned money to start flipping your next home investment project.

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