More and more people are getting into renovating homes and flipping them for a profit. One woman quit a well-paying marketing job to flip houses full-time, making as much as $135,000 in profit in just a few months. You can also flip houses on the side, while working a full-time job.
However, to get into house-flipping in the first place, you must secure the capital to purchase a home and renovate it. That isn’t as easy as it sounds, but even if you’re just getting started, there are some specific ways you can secure the funds you need to get started and build your flipping business.
1. Secure Bank Financing
For most people, bank financing is a good option to secure the necessary funds to buy and renovate a home. You may need a decent down payment if you don’t have any collateral to offer, but different banks will have different requirements. Your goal is to get a loan on the home you’re buying. The key to getting enough financing is to find a property listed below market value.
Make sure you can afford the monthly payments if the house doesn’t sell for a while. Some flips sell quickly, while others sit for months, depending on the time of year and the current realty market. You can borrow up to 80 percent of the value of the property for major renovations. Have a plan for making payments for a minimum of six months to be on the safe side.
2. Get Investors
Another option to get a loan for house-flipping is to bring investors on board. Investors offer funding for your project, but they also get a cut of the profits without doing any of the work. It’s a good idea to sign a contract to ensure there are no misunderstandings of the terms, especially if you’re working with friends or family.
Angel investors are unlikely to come on board, as the profit margin isn’t big enough to attract them. You’re most likely to gain investor financing via friends, family or local small business owners. Having a written contract in place keeps those relationships intact for future projects and from a personal perspective.
3. Use Your Savings
There are several advantages to saving money and using your funds to renovate a house and flip it. First, you won’t owe anyone money, so if it takes a while to sell the home, you won’t be paying out high payments or interest fees. You also will have complete control and total say in the choices you make, as you’ll have no one to answer to but yourself.
One drawback is that you may risk your hard-earned savings if things don’t go well, but at least you won’t be on the hook to a bank or investors. Perhaps you use more than one of these options, such as securing bank financing to purchase the home and using your savings to pay for the renovations.
4. Refinance a Current Mortgage
Perhaps you want to renovate the home you live in and then flip it, rinse and repeat. That’s a smart way to start flipping houses, because it saves you on your mortgage payment and allows you to take the time you need to upgrade your home before listing it for sale. It is also a way to keep getting a more valuable home without increasing your house payment.
Most banks will help you decide if a refinance is the best choice for your situation. They’ll look at the value of your property, the renovations you plan and the potential value of your property after said renovations. If a refinance isn’t right, they will guide you to the best loan option for your needs. Be sure to read all the terms to ensure you’re getting the best interest rate and repayment terms possible.
5. Home Improvement Loan
You have an option to take out a loan specifically to help you cover the cost of home improvement. If you’re living in the residence while you renovate, this is an excellent option to help you gain the loan you need to flip that house and move up to one that is higher in value. There are several options to help secure this type of loan, including an unsecured personal loan or a secured personal loan.
6. Fix-and-Flip Hard-Money Loan
Lenders specifically created this type of loan for the house-flipper. This loan is usually for the term of a year. It gives you the hard money you need to invest in a property and flip it, but you have to complete the work on a timeframe. These are sometimes called rehab loans, and the qualifications are lower than on a typical home purchase. It gives you the funding you need quickly, but the property must be worth what you’re borrowing, so you’ll need to find a property you can buy below market value to pull out enough funds to buy it and fix it up.
If you’re a seasoned flipper, then the loan may allow you to do the renovations yourself. For those new to the home renovation world, you may be required to hire a licensed contractor. If this is the case, budget the expenses even further by asking your hired contractor for a line-item estimate and account for his or her 15 to 20 percent profit margin.
7. Cash out Refinance
If you own an existing property that has some equity in it, you can refinance and pull that cash out. You have the option to use the money you’ve pulled out of your existing property for any purpose you’d like, including rehab costs on an investment property. Such a refinance will raise the house payment on your primary residence, so be sure you can afford the dent in your monthly budget. You can always pay your mortgage back down or refinance again after selling the investment property.
There are few things as rewarding as taking a home that is a diamond in the rough and turning it into something shiny and beautiful. Flipping houses takes business savvy, vision and determination, but there is still decent money to be had from the effort. Whether you’re already flipping houses or just considering dipping your toes in, there are many ways to secure the money needed to complete a successful flip.
Holly Welles is a real estate writer passionate about sharing finance tips for those diving into the market. You can read her latest tips on real estate and home improvement on her blog, The Estate Update, and follow her on Twitter @HollyAWelles.