June 2, 2021 5 min read
Opinions expressed by Entrepreneur contributors are their own.
Flipping houses can be a great option for revenue, particularly if you like decorating and cleaning, and you’re handy with a wrench.
However, it’s expensive. You’re not just buying land and the building; you’re also buying appliances, decorations, and any repairs and improvements you can’t do yourself. And you’re waiting on the sale before you can collect anything. This can be months or even years later.
But there is financing out there for flippers. Here are some options to tide you over until you can collect from the sale.
Commercial real estate loans
These are mortgages secured by liens on commercial property.
If borrower has no financial track record or credit rating, lender may require them to guarantee the loan. If a guaranty is not required, and the property is the only means of recovery in the event of default, it is a non-recourse loan. Lender has no recourse against anyone or anything beyond the property.
Generally, the longer the loan repayment schedule, the higher the interest rate. Interest rates tend to be higher than on residential loans.
Try an SBA 7(a) loan, or an SBA 504 loan. Or get a commercial mortgage from Freddie Mac, or Fannie Mae. Try credit unions, even life insurance companies. Another option is HUD.
Or, try a soft money loan, aka an online marketplace loan. Interest rates are higher than conventional bank loans, but lower than hard money loans. Often, online marketplaces match borrowers with shorter-term loans.
Equity crowdfunding
This is an equity stock offering from a company not listed on exchanges, which differs from rewards-based places (like Kickstarter) where investors get an incentive/perk for their donation. With equity-based crowdfunding, the investor receives equity.
Flippers need not issue an IPO. The business need not become a fully reporting public company. Investors need not be accredited.
Home equity loans
A home equity line of credit (HELOC) is secured by your house. You can get financing at a low interest rate. HELOCs are based on home equity, the value of your home minus what you owe on the mortgage. Tap into a HELOC if you have at least 20% equity in your home. Borrow up to 85% of the home’s equity.
Investment property lines of credit
Here, you borrow against your investment property’s equity. The property serves as collateral. To qualify, you often need good to excellent credit, and a history of successful real estate investments. In general, you must own the property at least one year for eligibility.
Business lines of credit
With this, you get access to a revolving credit line. You can use up to a set amount, but only make payments and pay interest on the amount you actually use.
Use it repeatedly if and when issues pop up. Or tap into it when you tackle your flip. You generally need superb credit, with a stable history of flipping success to qualify.
Seller financing
Work with the seller to come up with a payment plan and create a contract. You pay directly to the seller on an agreed-upon schedule, based on a price you both set, with interest. This poses more risk to the original property owner. Hence, you often pay a higher interest rate, with a shorter repayment term than other loans.
Bridge loans
Cover the gap between when you want to buy a property, and when you can secure long-term financing. It can help cover the cost of the down payment on your next flip. Then, focus on finding another financing option to cover the rest.
Generally secured by collateral, so you can qualify for a loan with a lower interest rate, versus other options. Often easier to qualify for.
Cash out refinance loans
Cash out refinance loans enable you to refinance an existing property to fund your flip’s purchase or renovations. Use your own home’s equity to take out a new loan and pay off the existing mortgage, and then use any remainder to finance your flip. To work best, you must have 30% – 40% equity in your home. Otherwise, it is not cost-effective.
Permanent bank loans/online mortgages
A regular mortgage with a fixed interest rate is likely best for buying a home to stay in for five years or more while renovating it. Pay lower interest than with other financing options with up to 30 years to pay.
You need enough for a down payment, good to excellent credit, and a stable income, to qualify.
Hard money loans
With hard money loans, you work with non-bank lenders (individuals or online lenders). Hard money lenders often have less stringent eligibility requirements. Qualify even with poor credit. These tend to have higher interest rates, often with shorter repayment terms.
Conclusion
Try these funding options and lay out less of your own money for fixes and flips.
