Best Ways To Fund Your House Flipping Business
June 18, 2021
Flipping houses is a common option for generating extra revenue, particularly for those who are good at handyman type repairs. That said, it’s often not a cheap endeavor. The cost can add up quickly because you’re typically not simply buying the land with a building on it; buy also appliances, and are on the hook for any repairs and improvements you can’t do yourself. You must wait on the sale of the property before you can collect any profits. This process can often take months or even years to complete. Luckily, there are several financing options out there for flippers. Below are some of the common options to help bridge the gap until you can collect from the sale.
Commercial loans are loans secured by liens on commercial property. If the borrower has no financial track record or credit rating, lenders will typically require them to guarantee the loan. If a guarantee is not required, and the property is the only means of recovery in the event of default, it is known as a non-recourse loan. In this scenario, lenders have no recourse against anyone or anything beyond the property. Generally, the longer the loan repayment schedule, the higher the interest rate. Commercial loan Interest rates tend to be higher than on residential loans so its important to understand how much interest you will be expected to repay before agreeing to any commercial loan deal you are offered.
Equity crowdfunding’s are equity stock offering from a company not listed on exchanges, which differs from rewards-based places (like Kickstarter) where investors get an incentive/perk for their donation. With equity-based crowdfunding, the investor receives equity. Flippers in these scenarios do not need to become a fully reporting public company and investors don’t not be accredited, which makes for fewer hoops to jump through when securing financing of a real estate flip investment.
Home Equity Loans
A home equity line of credit is a loan secured by your primary residence when you own a home. You can usually get financing at a low interest rate with these types of loans. Home equity loans are, as the name indicates, based on home equity. To figure out the potential equity you may have to invest, you should take the current value of your home and subtract what you owe on the mortgage. The difference will give you the equity accumulated on your primary residence.
Investment Property Line Of Credit
For this type of line of credit, you borrow against your investment property’s equity. The property serves as collateral to secure the loan. To qualify for these, you will generally need good to excellent credit, and a history of successful real estate investments. In general, you must own the property at least one year for eligibility. As a result, investment property lines of credit are usually not the best option for first time house flippers.
Business Line Of Credit
With a business line of credit, you get access to a revolving credit line. You can use up to a set amount, but only make payments and pay interest on the amount you actually use. You may use it repeatedly if/when issues pop up or when it’s time for your next real estate flip. You generally need great credit, with a stable history of flipping success to qualify for a business line of credit.
With these deals, you work directly with the seller to come up with the terms of a payment plan and create an agreed upon contract. You will pay directly to the seller on an agreed-upon schedule, based on a price you both set, with interest. This poses more risk to the original property owner. Therefore, you will often pay a higher interest rate, with a shorter repayment term than other types of loans.
Bridge loans cover the gap between when you want to buy a property, and when you can secure long-term financing. They can be used to help cover the cost of the down payment on your next flip. This frees you up to then focus on finding another financing option to cover the remaining amount. Most of the time, bridge loans will be secured with collateral, so you can often get approved for a loan with a lower interest rate, versus other options. Bridge loans are generally easier to qualify for than most other types of loans.
Cash Out Refi
Cash out refinance loans enable you to refinance an existing property to fund your house flipping project or for any necessary repairs. Borrowers can put up their own home’s equity to take out a new loan and then pay off the existing mortgage balance. Once complete, they may then use any remainder balance to finance their flipping projects. In order to be cost effective, however, you generally need 30-40% equity in your home. Otherwise, a cash out refinance loan is likely not the best option for you.
Long Term Bank Loans
These are traditional mortgages with fixed interest rates. Bank loans are usually best for those buying a home to stay in for five years or more while renovating it. You will usually pay lower interest than with other financing options with up to 30 years to pay. With these traditional loans, however, you will need enough for a down payment, good to excellent credit, and a stable income, to qualify.
Hard money loans
With hard money loans, you work with non-bank lenders. Hard money lenders often have less stringent eligibility requirements and you can often qualify even with poor credit. These loans tend to have higher interest rates, often with shorter repayment terms.
Whether you are a long term fix and flip investor or are interested in just getting started in house flipping to generate some extra income, try the above funding options to hopefully lay out less of your own money on the path of generating a new stream of investment income.