Thinking about flipping a property? You’re not alone. House flipping shows have been inspiring the “Average Joe” to buy, fix, and sell properties since the early 2000s, and now there are more home shows than ever.
These shows are fun to watch and can make flipping seem relatively straightforward, and it’s true, anyone can flip a property, but it’s not always as easy as-seen-on-tv.
We’ve been clear in other articles that we don’t view flipping as investing. It’s a job with an uncertain income at the end of the project. That being said, you can make money flipping properties if done right.
So, if you’ve decided you’re going to flip, the first hurdle is financing.
You’re going to need money to buy the home, finance renovations, carrying costs, and closing costs (which will come out of your profits).
So, yes, there is money to be made, but you’re going to need money to get started and throughout the project.
Unless you have mounds of money collecting dust in your bank account, you’ll need to finance at least part of your flip.
Here are the main financing options available to buy-flip-and-sell “investors”:
Traditional Bank Financing
When you think about getting a loan, you probably immediately think of the bank. Banks are by far the biggest lenders, but they can all be one of the more challenging ways to finance a home flip.
If you’re going to the bank for a mortgage to buy and fund a flip, you may have difficulty. Most flip projects only last 6-12 months, so the term of the mortgage is going to be much shorter to reflect that. And because of the short term, you can expect higher interest rates (banks usually make their money from having you pay interest for years).
You may have difficulty getting a mortgage for a short-term. Another option is to fix-and-hold, meaning, buy the property, fix it up, and hold it as a rental property for a few years. It will be easier to get a mortgage with a longer term, and this way you get the benefits of the flip, with the longer-term benefits of rentals (building equity in the home).
As with all rentals, make sure that the numbers make sense, and that you can rent the home for a positive monthly cash flow that accounts for the costs of the renovations.
Home Equity Loan or Home Equity Line of Credit
If you’ve owned a home for a while, there’s a good chance you have some equity built up in that property. One option for financing a flip is to use some of the equity from your home to pay for the new property.
You can do this in two main ways:
A home equity loan (a second mortgage), where you’re borrowing against your home for a fixed term, usually at a fixed rate.
Or, with a home equity line of credit (HELOC), which allows you to draw against your credit as you need it. HELOCs often come with a fixed rate for an introductory period, followed by a variable rate. This can work well if you’re only borrowing for a short period of time.
Private Lender (Hard Money Loan)
Private loans are a popular choice for investors who’ve been turned down by a traditional lender. These loans are good for people with less than stellar credit. This is a private loan from an investor or group of investors, who are personally financing your loan. It’s a shorter-term, higher-interest-rate loan. You’re also going to pay a lender-fee, legal fees, an appraisal fee, and a brokerage fee (if you go through a brokerage). It will cost more than going through a bank, but it may be an option if the banks won’t finance your project.
Borrow From Friends and Family
This is essentially a private loan, but it’s possible to get a better rate if you’re working with a family member or friend.
Getting into business with family or friends can be messy, and isn’t for everyone, but it works incredibly well for others. The key to successfully borrowing from friends and family is to be very clear from the start about roles, expectations, contingency plans, and exit strategies. Figure out all of the “what ifs” in advance, and if all parties still feel that this is a mutually beneficial opportunity, then this is a possible avenue for financing a property flip.
Even when working with family or friends, be sure to draw up a legal agreement with a lawyer, so all parties are protected.
Just like working with family and friends, you can find other investors on your own to partner with and form a joint venture to buy and flip a property. Joint ventures can split the financing and the workload, along with the profits, in a way that works for all parties.
A key to finding good joint venture partners is having a network of like-minded individuals around you. By surrounding people who are doing what you want to do, you’ll not only learn, but you may find future partners to work with.
The Rock Star Inner Circle is a network of hundreds of active investors in Southern Ontario. To find out more about joining this group of investors, visit www.rockstarinnercircle.com/member.