You don’t have to shake out the couch cushions to get funding for flipping houses.
Flipping a house takes a lot of money beyond the purchase price. The median purchasing price for homes in 2019 is $155,000. Add on rehab costs, appraisals and inspections, holding costs, realtor fees and closing costs… it takes a lot of money to turn a profit on your fix and flip.
If you’re flipping one, two, or dozens of houses a year, maintaining adequate cash reserves is critical to keeping your operation up-and-running until you can realize the back-end profits of your flip. Cash, as they say, is king.
That is why so many house flippers finance their fix-and-flip properties. In fact, flippers have financed 6.4 billion thus far this year—a twelve year high. Knowing all of the financing options available will allow you to choose the best fit for your level of experience, risk tolerance and plans for the future.
See all your funding options at once.
#1. Private Investors: No leverage, all equity.
If you have friends, family, or colleagues that want to get in on your investment, all you need are these three terms to solidify your private investor loan:
- A promissory note listing terms that both parties agree to follow.
- A deed of trust connecting the private investor’s investment to the purchased property.
- Hazard insurance to give the private investor a level of security for their investment.
You usually pay a private investor back in one of two ways: either with a monthly installment or, after selling the house, in one lump sum that includes interest. Either way, the interest rate provided by a private investor loan is typically higher than a conventional bank loan and can often be higher than a hard money loan.
#2. Conventional Bank Loan: Some leverage, some equity
Banks are reticent to provide funding for flips, since the risk of failure to pay is higher than that of a home you intend to live in. If you succeed in getting a conventional loan, the application process can get lengthy, thanks to extensive due diligence requirements, regulatory check-offs and rigorous credit sign-offs. The bank might also require proof that you’ve successfully flipped a certain number of homes in the past.
If you are approved, most conventional loans will require the borrower to put down a 20% down payment to purchase the house and a 20% down payment for the repair budget on the house. That’s a lot for one house and it adds up with each additional fix-and-flip property you take on.
#3. Hard Money Loan: More leverage, less equity
“Hard money” is actually one of the easiest loans to get because it’s usually provided by private lenders with a specialty in the fix-and-flip business in your market. The purchase and repair advance rate provided is typically higher than a conventional bank loan.
However, you have to pay-to-play in the hard money space. The national average for hard money lenders is an interest rate of 12% to 14%. You typically get a payment of 90% up to 65% of the “after repair value” (ARV) of the house. At closing, you’ll pay an origination fee of two to four points of the total paid up front. While this is more expensive than most conventional bank loans, the average hard money lender can provide funding for the flipper within 10 to 14 business days – and in this business, time is money.
All hard money lenders are not created equal. Residential Capital Partners provides an advance rate of 100% funding up to 70% of ARV, a 10% interest rate and an origination fee of 3 points that can be rolled into the loan. That means an investor can close a transaction with no money down.
This allows investors to maintain healthy cash reserves during the investment period and it aligns our interest with the borrower’s interest: we get paid when you get paid.
See all your funding options at once.
Use our handy real estate investment loan comparison chart to weigh the pros and cons of your funding options.
Do we check all the boxes? Apply today for a loan through Residential Capital Partners in just 14 minutes. Once you’ve been approved, we can move you through the approval process so you can close within 14 days.