Loan Options To Start House Flipping
Flipping houses has become a lucrative career for many, but getting involved in real estate investing also has a sharp learning curve. One thing novice house flippers must discover first is where to get the money for their first investment. Someone with little or no experience might think a traditional mortgage is the only option. If mortgage rates are low, that isn’t necessarily a terrible option, either. But, there are other loans for flipping houses that an investor could apply for.
It’s also important to know that there are additional costs that need to be considered when purchasing a house for flipping. These include:
- Purchase price
- Legal fees
- Closing costs
- Utility payments
- Property and/or liability insurance
- Renovation costs
- Material costs
- Marketing and sales costs
Factoring in these costs is important when seeking loans for flipping houses. One of the last things an investor wants is to run out of money during the project.
Loans for flipping houses
There are several options for obtaining financing for a house flip. These include:
If mortgage rates are low, it might be worth it to get a conventional mortgage for a house flip. Doing so may save money on interest, as other types of loans for flipping houses usually have much higher interest rates. A few drawbacks to the traditional mortgage process, however, is that the approval process can be much longer and it requires additional regulatory requirements and documentation. Investors can lose out on purchasing a home for flipping, if they don’t get the cash quickly.
Hard money loans
A strong alternative to traditional mortgages and a very popular choice for real estate investors are hard money loans, which are usually much easier and quicker to get. The property for purchase is used as collateral for the hard money loan. Another advantage of this loan is that you can get approved in a matter of days and close on the loan faster than a traditional mortgage.
However, interest rates are higher, and typically the loan must also be paid back in full within a few years. Therefore, short-term products such as hard money loans are ideally suited for real estate investors who plan on flipping a house and paying off the loan quickly, without having to pay interest for too long.
Personal loans are another option, and many lenders offer personal loans with high interest rates. Lenders will typically use credit scores and income information to determine if an individual is eligible for a personal loan. Loan terms can be more favorable than hard money loans, with lower interest rates and more flexibility in how long the borrower has to pay it back.
Depending on the purchase price of the house and the additional costs involved, the amount someone can borrow with a personal loan still might not be enough to sufficiently cover all the costs. But if an investor can supplement the rest with their own cash, a personal loan can be a good choice.
Home equity loans
Some house flippers just starting out decide to use their own homes as collateral, in order to secure a home equity loan. Interest rates on home equity loans can be fairly low, and there is usually more flexible terms in paying it back as opposed to a hard money loan. However, homeowners must have built up a good amount of equity in their home, in order for the loan to provide enough financing for another house purchase.
As an alternative, homeowners can also opt for a home equity line of credit. This line of credit is also backed by an investor’s home, but instead of getting the funding all at once, the investor uses the line of credit as they would a credit card. Borrowers use what they need, when they need it, and pay it back just like they would with credit card debt. A drawback to a home equity line of credit is that interest rates can be variable, whereas home equity loans may be obtained with a fixed rate of interest.
Both a home equity loan and a home equity line of credit might also be subject to closing costs and additional fees for appraisals, notarization, origination fees, and title fees.
Using a retirement fund to finance a house flip is yet another option. Many retirement funds enable borrowing and there are usually minimal requirements for approval. How much an individual can borrow depends on how much is currently in his or her account, as well as current IRS limitations.
It is highly likely that the amount that can be borrowed via a 401(k) will not cover the purchase price of the house flip. Investors will need additional capital from another source. Additionally, if the investor leaves their job for any reason, they may have to pay the loan back in full immediately. Additionally, borrowing from a 401(k) may have tax implications. Finally, pulling a large amount from retirement savings could also adversely affect a flippers retirement.
Understanding the benefits and disadvantages of the various types of loans for flipping houses is an important first step in getting involved in real estate investing. It’s also important to realize that flipping houses can also be a risk, and there is never a guarantee that investors will make a profit. Speaking with professionals in the industry and learning more about all aspects of flipping houses will improve the chances of success.