House flipping works by buying a house at a discount then selling it later on for a profit. House flippers typically do some minor renovations to restore the house, increase appreciation value, and turning it to profit. Flippers need to minimize the repair cost to fully maximize the profit potential of the property being flipped.
Learn How House Flipping Works
As mentioned, house flipping is a profitable type of real estate investment with the huge potential to earn a profit. However, if you aspire to become house flipper, a huge amount of capital is also needed to purchase a house to flip.
If capital isn’t a problem at all then you’re ready for the next step, otherwise, you need some form of financing to sustain your aspiration of flipping a house. There are several options to do this, and Lending Home wrote some helpful tips in getting financing for house flipping. Read more below to learn more.
How to Get Financing for Flipping Houses
So you’ve found the house you want to flip, and now it’s time to make an offer on the property. In this piece, we’ll go over your options and how to decide which one is the best fit for your deal and your business. We’ll do a pro and con analysis of the following:
Once upon a time, an investor proclaimed “cash is king.” And, depending on the circumstances of your deal and your plans to flip other houses in the immediate or near future, cash might be the best option. If you have the cash reserves to buy a property in full, here are some things to consider:
Speed. turnaround time from the property belonging to the owner to the property belonging to you. Remember, if you need to close fast and have the cash, you can refinance later and pull most of your equity out of the property.
Inexpensive. Taking out fix and flip loans incurs borrowing costs. There are often application fees and origination fees upfront, and then monthly interest payments for the duration of the loan. Buying in cash means avoiding these costs, which helps your margins.
Ease. Borrowing money can be a time-intensive and often painstaking process. Loan applications will often require you to send in lots of documentation, such as bank statements, tax returns, and other personal info that may be difficult to gather in a timely manner. Also, have you ever used a fax machine? It’s no fun. Many lenders, especially mortgage lenders, are still highly dependent on outdated systems.
Capacity. Houses are not cheap—the median cost of an American house is around $200,000. Not many people have cash reserves that large.
Ever asked your friend for 20 bucks? Then you’ve experienced what it’s like to borrow from a private money lender. If you opt not to buy in cash, and you have private financiers in your network with the necessary funds, this could be the route for you. We’ll split private money lenders into two categories: private lenders and friends and family.
Private Money: Private Lenders
When we say “private lenders” we are referring to third parties whom you may not necessarily have a close relationship with. These are financiers in your network that are not official corporations and therefore are not regulated in the same way that banks or hard money lenders are. These lenders may offer you funding on a deal-by-deal basis, or offer you access to a line of credit. Learn more about this story here…
As mentioned in the above article, there are several ways for aspiring house flippers to get financing for their house flipping, with each way has its pros, cons, and risks. Choosing the best financing that suits you based on its pros and cons is your decision to take. Also, if you don’t have cash then financing through loans is your option.
Priyanka Prakash of Fundera explains further the best options for the fix and flip loans. There are several best options for it as well. Read the article below to learn more.
Fix and Flip Loans: The 8 Best Options
Researchers from Attom Data found that house flippers renovated more than 200,000 homes in 2017, with an average profit of $68,143 per property. That’s a lot of houses—and a lot of money. Despite the popularity of house flipping, the biggest barrier to entry and success in this space is cash. Without enough money, you can’t purchase the home, pay for renovations, or find a buyer for the property when the time comes to sell.
Fortunately, there are multiple options for fix and flip funding, allowing you to quickly purchase your property and get your project underway. Even with your first flip or your 50th, you can use fix and flip funding options to add to your portfolio and grow your business as a real estate investor.
Here’s what you need to know about eight creative fix and flip loans, how to choose the best one for you, and what to do before approaching a lender. We’ve also included info from house flippers who’ve successfully gotten funding for flipping houses to grow their own real estate businesses.
An Introduction to Fix and Flip Loans
Every house flip starts with actually finding the property. We’re not here to talk about that, but read this link on how to find a house to flip if you’re not quite sure where to start. Once you find the property, you’re left with figuring out how to find funding for your flip.
And unless you’re independently wealthy, you’ll have to borrow money to finance four parts of your house flip:
- The purchase price of the house (you’ll need to bring 20% to 45% of the purchase price as a down payment depending on the lender)
- The “holding cost” of the home (e.g. insurance payments, HOA fees, and other costs of owning the home while renovations are underway)
- Materials and labor for the renovation
- Realtor costs and closing costs to find a buyer and sell the property post-renovation
The first thing you should know before searching for funding for flipping is that getting traditional bank loans for fix and flip projects usually isn’t the best route.
As a house flipper, you’re essentially a real estate investor, and your income can be seasonal and irregular. So, most banks won’t give you a business loan for fixing and flipping properties. And even if a bank is willing to work with you, their loan product might not be suitable. Bank loans are generally long-term loans—and most flippers buy, renovate, and sell a property within a few months. See full post here…
Each of these options has its pros and cons, so for first-time house flipper, it is crucial to study and understand everything before deciding on the loans you will take. Once you have the money, you may then start with house flipping.
The last important thing to remember is that not all loans for house flipping works. Some loans work and some loans do not work. Justin Pritchard explains further the loans for flipping houses in his article at The Balance. Check out his article below.
Loans for Flipping Houses: What Works and What Doesn’t
A house flipping business can provide a healthy income and the opportunity to change careers. Based on popular television shows, it seems easy to do, and you don’t need to spend years in an expensive education program to be successful.
Unfortunately, it’s not as easy as it looks. Proper planning and technical know-how are essential, but the greatest roadblock is probably funding — it takes money to make money. So how do you get the money?
Private investors, including people you know and hard money lenders, are the best source of loans for flipping houses. Those lenders do not require the same amount of time and paperwork as traditional banks. Instead, they evaluate the property itself (both before and after improvements) and your ability to successfully complete the project.
Mortgage Loans for Flipping a House?
Traditional home loans will probably not be an option for buying investment properties — at least when you’re starting out.
The good news is that loans from banks and traditional lenders are relatively inexpensive: interest rates are among the lowest you’ll find for investment properties (but you’ll still have to pay closing costs). Unfortunately, these loans are not always practical.
Slow to Close
One of the main challenges with using a traditional lender is the time it takes to close a loan. Lenders require that you fill out an extensive application, and they’ll go through your finances with a fine-toothed comb. If they see anything that raises questions, they’ll ask for more documentation, and they’ll take even more time to review your application. The process rarely takes less than 30 days (45 or 90 days might be more realistic), and investment opportunities often move too fast for that timeline.
Especially if foreclosures or short sales are part of your strategy, you’re likely to be frustrated by the speed of traditional lenders.
Traditional lenders base their lending decisions on your ability to repay a loan. They’ll look at how much you earn each month compared to required monthly loan payments to calculate a debt to income ratio. If you’re a real estate investor or otherwise self-employed, you might not have the type of “income” they’re looking for (lenders like to see W-2 forms and pay stubs). Learn more here…
Financing house flipping has lots of dos and don’ts that every aspiring house flippers must take into consideration before diving into the loans. Read and understand every term to avoid getting into a debt trap in case you won’t become successful in your first couple of tries flipping houses.
One key factor in house flipping is being able to sell houses fast. If you don’t know how to sell a house fast, we at Dependable Homebuyers can help you. To learn more, visit https://www.dependablehomebuyers.com/sell-your-house/
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