Originally posted on WalletPath.com 5/30/16.
With so many avenues to make money available these days, it may be difficult to choose one direction to pursue that works for you. House flipping, the act of buying a property for a lower price and then selling it at a much higher one, is an endeavor that is avoided by many due to how difficult and risky it may be to successfully pull off. Although it is a road marked with many potential pitfalls, with proper guidance and know how, house flipping is a fantastic way to make a profit.
The most essential aspect of house flipping is finding funding. Unless a plot of real estate was just somehow donated to you by a relative or overly generous family friend, you will have to buy up the house that you eventually want to flip around for a profit, and as you may have noticed, houses and land that holds houses is pretty far from cheap. Since finding funding to buy the property and spruce it up is the hardest part, where do we start looking?
Below are just a few ideas on where you can look to receive funding for your future house flipping projects.
Do your homework.
Before you get too far ahead of yourself, you need to be aware of all the costs that are involved in flipping a house. The more details you know and can present to lenders about flipping the property, the more likely you will get approved for funding. It’s not as cut and dry as just buying a property, fixing it up and then selling it again later, although it certainly would be nice and easy if it were…
There are quite a few licensing fees and permits that you would need to procure in order to legally go about this sale. These costs and fees are numbers that you should be aware of when it comes to doing the math before you get started to see just how much money should you seek a loan for.
Where to find funding.
Once you get a solid number down to see just how much funding you will need to collect to get started, it’s time to begin your search for a funder for your project. Finding an individual or group that will lend you cash to get started can be as easy as you want it to be, but of course, the easier it is to find a lender, the more costly they will likely be. Here are a few ideas on where you can find lenders:
- A loan from a bank
Banks lend money for house flips all the time, so your project proposal to them will be met by an understanding bank representative. What you need to have if you are going to apply for a bank loan is a solid business plan for how and when you will pay it back, and impeccable credit. Know what exactly you want to have the finished property be like, how much the renovations will cost and what they are, and when you want to make the property available on the market again. The more you have planned out for your property and the market that it will be sold into, the higher your chances are to get approved for your loan.
Also, be aware that the interest rate on your loan will be more on the higher side if you go to a bank. Certainly not the highest interest rates available (at around 5%, maybe less depending on the length of time and the project), think of it as a convenience fee, as finding independent lenders that are not corporately owned that can offer lower interest rates are pretty difficult to find as compared to a single trip to a bank.
- Hard money loans
Hard money loans are a good way to collect funds quite quickly and easily, but be prepared for higher interest rates, and also be ready to put down your own property as collateral. This type of loan is best for those who know what they are doing when it comes to flipping houses, as these loans are best for very short term loans as compared to long term. With interest rates averaging from 2% all the way up to 10%, you want to minimize the amount of time that you are working with hard money loans. Best for quick fixes like surprise renovations for the property you are fixing up.
- Private lenders
If you can find a private lender such as a friend or just a business savvy acquaintance looking for a project to invest it, try your best to work out a deal with them as compared to a bank. You have a better chance at negotiating very low interest rates with an independent lender than you can with a faceless corporation.
Be careful with entering into business with a friend or family member, because if things go south for your business endeavor, the relationship can enter into hot water and make things very difficult for the future.
If this is the first time you have flipped a house, then it may be worth the effort for you to seek an experienced partner to help you. Having a partner who can guide you as you go about making decisions about keeping costs low and profits high is invaluable in your first house flipping endeavor, and as house flipping can be very lucrative if done well, you want to learn as much as you can for your future house flips done on your own.
Go FUND yourself.
For those in a position to do so, put up the money yourself! Why worry about interest rates, collateral, and keeping up relationships with lenders and business partners when you can knock the entire thing out on your own and reap the benefits alone? If you can fund the purchase yourself, then go for it.
Using credit cards to your advantage will also be a big help here. When it comes to buying materials for sprucing up the property, put it on the cards to be paid off when the payday happens on the property. Be sure to keep careful track of what you put on the cards though, as you will still have to pay them off as soon as you can to avoid interest from building up. Spread the payments around to avoid too steep of an interest build up.
If you have skills that you can use to your advantage to save money, then all the better! If you have a background in plumbing, carpentry, wiring, or brick work, then all the better for you, because rather than paying for labor, you can keep your profits up by taking care of it yourself. Just be sure to have the proper permits in order before you embark on any heavy changes to the property.
Flipping a house can be a great way to get a huge boost in your income. Although it looks scary and expensive, it really doesn’t have to be. Find a property, find funding, and if possible find a mentor. Find those things and you are ready to go. Happy flipping!