How To Finance Your House Flipping Business in 2021
Flipping houses can be a lucrative business but only if you do it correctly. This is how to finance your flipping business the right way.
Home flipping in the U.S. averaged a gross profit of $67,902 per home flipped in the second quarter of 2020. The first quarter averaged a profit of $63,000. Despite the decline in home flipping, these ventures are still profitable and worth pursuing.
The house flipping business is one of the most lucrative ventures you can delve into for reliable income. You have to know how to go about financing the projects, which isn’t always cheap. In fact, most people interested in this venture often shy away due to the financial implications of flipping a house for sale.
If you want to start a flipping business, there are several financing options at your disposal. Read our guide to learn how to finance your house flipping business.
Get a Financing Partner
For house flippers with years of experience in the industry and deep market knowledge, chances are that they have a rich personal network. Finding a financing partner for your flipping business will be easier if you have a circle of associates in the same field.
Your partners can help find the ideal flipping opportunities, manage the house renovation, and flip financing. You’ll need to share these profits with the partners, depending on what they bring to the table. It would be best to have different partners to execute diverse tasks.
Partners can share up to 50% of the profit made, which is the same case if you make losses. It is crucial to have a partnership agreement. You can further involve a lawyer to help you wade through complex situations in the future.
Hard Money Loan
Do you know what is a hard money loan? In its simplest definition, a hard money loan refers to a short-term loan that you secure with assets such as real estate properties. You can use hard money loans to fund and flip houses.
These kinds of loans have slight differences from the terms in a traditional bank. They are ideal for people who have poor credit but want financial assistance to renovate the houses. The loans are short-term, and you might need to repay within a year.
With hard money loans, the qualifications for approval are not as strict as with a traditional bank. In less than 15 days, you will get the finances for your house flipping business. The money lenders often focus on the potential value of property other than a borrower’s background.
Unlike other fix and flip loans, the interest rate with hard money loans can be slightly higher. It would help to understand all the costs involved to ensure that your identified lender gives you the best terms. However, hard money lenders often require a significantly small amount as a down payment, making it more attractive for anyone starting the house flipping business.
Home Equity Loan
One of the fixes and flip financing options that you can consider for your startup is a home equity loan if you’re a homeowner. The home equity loan, also known as the home equity line of credit, gives you adequate access to financing for the house flipping. This type of financing doesn’t limit you on the amount of money you can draw for the business.
Equity refers to the difference between your mortgage balance and your home’s market value. The loan amount that you can get is limited to 85% of your home’s equity. Your loan’s actual amount will also depend on the credit history, your home’s market value, and income.
With the home equity loan, you’ll only pay the interest based on the money you have used. The best part is that the rates are quite low. However, the home equity loan wouldn’t work well if you don’t have adequate monthly income or good credit.
Financing From Family and Friends
If you have friends or family members interested in joining the real estate industry, you can request them for a loan for your house flipping business. Your close connections can give fix and flip loans with friendly terms. While you can flip houses with no money, you’ll need enough cash to run the business, and getting a loan from friends or family is an ideal approach.
It’s not surprising to find a family member who wants to invest in real estate but not sure where to start. They won’t ask for your credit history to establish if they can trust you with their cash. Given the personal connections with such networks, you will enjoy lower interest rates.
However, it is crucial to ensure that everything is in writing to avoid future conflicts and broken relationships. Specifying the repayment period and the interest rate is crucial when signing a loan agreement with friends or family. A written document will protect you and the lender.
You might also want to follow the securities and IRS laws surrounding family investments. The fix and flip loans have varying terms that will depend on the loan’s size, property specs, and geographic market.
House flippers with adequate retirement savings can use the 401(k) to finance their project. If you have funds in your 401(k) account, you can withdraw to finance your house flipping business. This type of financing is not ideal for someone about to get to their retirement age.
Younger flippers are more likely to benefit from the 401(k) as the rewards will outweigh the risks. Employers’ accounts often allow you to take a loan of up to 50% of your account balance. The loan is tax-free, and it can prove helpful when you start a flipping business.
Like any other loan, you have to pay the interest. Since the cash is yours, you’ll be paying the interest and principal to your account. If you have been wondering how to buy a house to flip, getting financing from your 401(k) is an ideal option as the rewards are worth it.
While 401(k) provides an easy way to get house flipping business funding, you have to be wary of the cons. In case you leave your job, you’ll repay the loan in full. If you have unpaid amounts, you must consider a distribution plan, which will involve penalties and taxes.
Seller financing is when the home seller takes the role of a lender. The seller can finance all the activities involved in the fix and flip, saving you from the typical loans. With homeowners in dire need to get the house selling as soon as possible, you can negotiate for seller financing.
The seller becomes the financier by extending you the credit you need to buy the home. A flipper usually signs a promissory note, which indicates the repayment schedule, interest rate, and actions to be taken if you default.
This approach to the house flipping business has advantages for the flipper and the homeowner. The closing process will be cheaper and faster. You’ll only agree on a considerable down payment with the seller.
The payments are often interest-only until the property is sold, where the flipper pays a one lump sum to the seller. Seller financing attracts a higher interest than most other typical loans.
Some home sellers might turn down your proposal if they consider you a credit risk. It’s crucial to assess all the rigorous requirements upheld by sellers to avoid future frustrations.
Once you have the right tips to fix and flip houses, you can decide to take a personal loan to finance the business. An unsecured personal loan depends on your creditworthiness. A lender can give you funds for your house flipping business without putting up any collateral.
Your income and credit score are among the factors that will determine if you qualify for the personal loan. The information guides lenders in assessing your loan repayment ability. Your credit score has significant impacts on the maximum amount you can borrow, length of repayment, and interest rate.
Lenders have varying limits on the amount one can borrow. It is crucial to make a comparison when looking for a personal loan. You can get a lender who will give you the amount you need to complete the project.
The surge in online lending has made it easier to get personal loans. You can request a loan at the comfort of your house. However, it’s crucial to execute your due diligence to avoid falling into the hands of scammers.
A House Flipping Business Is a Lucrative Venture
House flipping is one of the ventures you can consider if you’re delving into the real estate industry. The main downsides to the house flipping business is the money required for the flipping. If you’re a startup, the financial implication might feel overwhelming.
Do you want to start the house flipping business, but you’re financially limited? Orchard Funding is your ideal lending partner. Contact us today to get a loan for your flipping business.