Flipping houses for profit involves buying a property for a short term period, generally 6 months to 2 years, and selling it for profit.
Most real estate investors take the fix and flip route wherein you buy a dilapidated property, conduct repairs and renovations and then sell the upgraded property for profit. If you are looking to take on a challenging project that can generate a profit, you would find flipping to be a fulfilling and worthy investment.
Flipping houses for profit is becoming increasingly popular among the real estate investors in the United States. According to recent data, 7.5% of all home sales in the country in the first quarter of 2020 were flipped, which is a 14 year high.
Buying, renovating, then quickly reselling houses for profit can be a highly lucrative endeavor. However, it is the financing aspect that often leaves real estate investors stumped. Here are the potential sources from where you can get funding for financing a house flip.
1. Traditional Mortgage Loans from Banks
Getting a loan from traditional sources such as banks or credit unions for flipping a house isn’t easy. Even if you have a perfect credit score and tick off on the lengthy list of requirements that traditional lenders have, banks are often hesitant to finance house flips as they are riskier propositions.
Borrowing money from a bank or mortgage lender may get you some of the lowest interest rates, it’s not usually the best option for the first-time investor.
The application process typically takes between 45 and 90 days. In case of fixing and flipping a house, the investors typically want to get started as quickly as possible, but the long timelines and rigid structure of loans from banks and mortgage lenders makes it challenging for real estate investors.
However, if you have a solid credit score, favorable debt-income ratio, would like to take your chances as a first time flipper, and plan to occupy the property as your residence, mortgage loans offer some of the lowest interest rates in the market.
2. Hard Money Lenders
Hard money loans are short-term loans from private lenders. Hard money lenders offer real estate backed loans i.e. the property itself serves as a collateral for getting a loan. Hard money loans are the best option for a real estate investor looking to finance a house flip.
Hard money lenders look at the after repair value (ARV) to determine the profit margin on a flip. Your funding will thus be based on your project’s ARV. If you have experience flipping houses and have a proven track record in your portfolio, you can even get a loan for up to 100 percent of ARV, getting you access to funds you need to conduct repairs and renovations.
While the interest rates for hard money loans are higher, they offer significant advantages to make up for it. Not only are the lending guidelines flexible, hard money loans get approved at a much faster speed than conventional lenders. As a real estate investor, a quick closing can put you at an advantage over other buyers.
3. Cash-out Refinancing
A cash-out refinance allows you to capitalize on equity that you’ve built up in your home and provides you with cash in-hand now in exchange for taking on a larger mortgage. By refinancing your mortgage for more than you currently owe and taking the difference in cash, you can use the extra liquidity to finance the house flip.
Cash out refinancing provides you cash in all at once after the refinancing is approved, giving you access to the capital you need to carry out the repairs, renovations and remodels you have planned by leveraging the equity in your home.
Since the interest rate on the refinancing is the same as that of your existing mortgage, it makes it an attractive option. However, you need to have a minimum credit score of 640 at least and a debt to income ratio of less than 45 percent to qualify for it. Additionally, you need to have at least 30-40 percent equity in your property to get cash-out refinancing.
4. Home Equity Line of Credit
If you’ve built equity in your home, you can tap into it and use some percentage of that equity to fund your house flip. You can either get a home equity loan or set up a home equity line of credit (HELOC) to finance your house flip.
The home equity loan provides you cash upfront while establishing a line of credit gives you access to the money in chunks over the duration of your loan.
A home equity line of credit (HELOC) is a form of second mortgage that allows you to borrow money against equity you’ve amassed in your current home, and obtain access to that money in the form of a line of credit.
While the interest rates when using home equity to finance your house flip is low, the risk is considerably higher. Since your own house serves as a collateral, in case you fall behind on your payments, the bank can decide to foreclose on your property, making it a riskier proposition.
Benefits of getting a hard money loan to flip a house
Hard money loans are the most popular option when it comes to getting funding for financing a house flip. There are a number of benefits when dealing with hard money loans which make it a popular option among both novice and experienced real estate investors looking for short term loans for flipping a house.
1. Shorter timelines
Hard money loans are typically short-term, making them perfect for financing a flip. Unlike conventional loans which may take upto 3 months just to process, hard money lenders can give you the capital you need to get started on your project in a matter of days.
2. Less risky
Unlike cash out refinances and home equity line of credit, hard money loans are tied to the property value itself. Since the property acts as collateral, you don’t have to worry about the lender foreclosing on your property.
3. Increased capital availability
Since the loan value that is approved is based on the after repair value calculated, and not the existing property value, it gives it access to funds that you need to carry out repairs, while making a decent profit in the process.
4. Easy approval process
Hard money lenders are not subject to following rigid guidelines as opposed to conventional lenders such as banks. With flexible underwriting and minimal documentation requirements, the ease of getting a hard money loan for financing a house flip makes it a lucrative option for real estate investors.
If you are looking to flip houses for profit but don’t have funds or want to limit your risk, hard money loans are one of the best options available to you. Have more questions on how you can go about financing your flip? We are here to help.
With a track record of successful lending across the US and local expertise as real estate investors ourselves, 14th Street Capital is the one stop destination for all your funding needs. Get in touch with us today.