We’ve all watched home and garden television shows about house flippers – real estate investors who buy ugly houses to renovate and sell for a profit – but have you ever thought about starting a project of your own? House flipping isn’t as easy as they make it seem on TV, but it’s certainly doable. In fact, thousands of investors flipped single-family homes in the second quarter of this year with an average gross profit of more than $70,000.
Sounds like a pretty nice way to supplement your income, doesn’t it? We think so, too. That’s why decided to do some research as to how a gal goes about financing such a big purchase. As it turns out, getting a conventional loan to flip a house isn’t as easy as it used to be. Banks have tightened their restrictions on loans for investors so much that it can actually be really tricky to get the cash you need.
You see, banks like to finance properties that will be held for the long term because they make money on the interest paid. House flipping projects aren’t ideal for banks, because most flips are sold an average of six months after they’re purchased. That’s why you’ll likely need to look for short-term financing. Unfortunately, this method is typically a lot more expensive and harder to find.
That being said, we’re firm believers that anything is possible. This includes getting enough money to fund your flip without digging too deep into your own pockets. Here are a few types of financing to look into when budgeting for your next house flip.
A hard money loan is a type of short-term financing that is typically issued by a private investor or company. House flippers like hard money loans because they require little money down and typically have very flexible terms. What’s more, a hard money loan is based off the value of the home once it’s all spiffy and renovated, rather than the purchase price. This means you could potentially finance the cost of the home plus some of the repairs. However, hard money loans are pretty expensive. Interest rates can range between 12 and 18 percent! Be sure to read your loan agreement carefully to avoid any unpleasant surprises.
A private money loan is just a fancy way of referring to a friend, family member, or colleague who provides a loan to help fund your real estate investment. Really, anyone could be a private money lender. Even your family physician! Private money loans are primarily based on personal relationships and trust. They usually don’t involve any qualifications or hoops to jump through, and they’re way less expensive than working with a hard money lender. If you have a close relationship with someone who has the resources to fund your investment, this is arguably the best route.
Portfolio lenders are local banks that loan their own money. Because of this, they don’t have to meet Fannie Mae’s guidelines when lending. This is good news for you because you won’t have to adhere to the super-strict lending requirements imposed by national banks. Since portfolio lenders would go broke if a lot of people defaulted on their loans, most charge above-average interest rates or limit their offerings to homebuyers with the best credit. Additionally, keep in mind that a portfolio lender will want you to have all your accounts and money in their bank. The better relationship you build with your portfolio lender, the better loans you’ll get.