Chapter 4 – How to find a decent source of money to flip a house
All the calculations are worthless if you don't have the money to buy the property in the first place, which happens to be one of the biggest mistakes of new flippers. However, an experienced flipper can also find himself short on the finances, so you need to know how and from where to get the money.
Despite what you may think, flipping a house is an expensive business, even if you can make the repairs yourself. Finding the right deals is not a piece of cake and when you are financing the purchase, each day spent on the house, repairing it and owning it will cost you money, money that is not 100% deductible, as they come in the form of interest rates. Then, there are capital gains taxes, which can also add up.
Financing can make or break a deal, so you need to master the art of leveraging, getting beneficial loans and generally finding money to keep your business alive and kicking.
The first step when you start looking for financing is getting to know your partners, know the banks that can lend you money. The first thing you need to know is they want you to succeed, because banks are in the business of lending money, not dealing with foreclosed properties.
Once you get to know your business partner, you can start trading and develop a long and steady relationship, which will bring you various benefits.
There are many ways to finance a real estate investment and some of them are actually dedicated to house flippers.
Mortgages are a great ways to finance a flip, so, if you have a house you can put it on mortgage. However, if you are a beginner, you may not want to jeopardise your own place, so this might be a great way to find the money for someone who is already in the real estate business for some time now and knows what to expect from the flipping process. One of the advantages of a mortgage is the relatively low interest rate.
Portfolio lenders are a special kind of financiers who can help you get the money. To become a portfolio lender you need to use your own private funds; banks usually use other people's/companies money for lending, so they are not portfolio lenders; at least, most of them are not. A portfolio lender is able to provide more flexible conditions for the loan, which comes as a blessing for many investors. It might be difficult to find a portfolio lender as most of them don't advertise publicly, so you might need to find some great referrals, but it does pay off in the end.
Federal loans might also be a solution to the problem, if you know how to take advantage of the exceptions. Typically, these loans are not only given to people who are going to live in the house, but they are also given to those who are going to live in one unit of the property. This means you can buy a duplex type of property and rehab some of the units, while living in one of them yourself.
203k loan is dedicated to investors who want to flip a house, so you might want to look into them and see what conditions they have for you. Some loans also require you to live in one unit of the house, so you can buy a multiple unit property and rehab it with the loan, which gives you the ability to finance the repairs in itself.
Hard money is a type of financing obtained from private businesses and it may be highly customised. However, there are some fixed characteristics of this type of financing. First, the loan is based on the value of the property, which allows you to make profitable deals after you fix the property. The loan has a higher than normal interest and comes on a short term, but it doesn’t require income verification or credit references and neither does it show up on your personal credit report.
Hard money can help you a lot when flipping a house, but you might also get in a huge trouble, so use it with caution. Private money is a lot like hard money, but the main difference is the relationship between the lender and the borrower, which is closer.
Private money comes with lesser fees and can be negotiated more than other financing sources due to that close relationship. This is a great financing source for many investors because it comes with a number of advantages for those who can raise the value of the properties over a short period of time.
Credit lines and home equity loans are popular among flippers who have equity in their home. There are many types of loans and credit lines that can help you get the money you need, in time. Depending on each institution, there are banks that offer up to 90% of the value of the house, so find your options with the banks. Apart from the advantages of getting a credit line, your money is being secured by your older property and you have complete control over it, which allows you to offer cash money to potential sellers.
Partnership is another option when it comes to financing your investments. If you have the know-hows of house flipping, but don't have the money to invest, you can find someone who can help you with the financial part. The equity partnerships have their own ups and downs, but at the end of the day, if you can get the money to start the business, you can benefit a lot out of this form of financing.
Apart from the financing methods exposed in this Chapter there are many other ways that can help you start the business and get the money for the flipping process over the year. When you pick a financing method you need to know your exit strategies, so you can evaluate how you are going to pay the loan you get and how you are going to refinance to make the next purchase. Having a good credit card score is essential, but not the only thing which matters, so know your options before you sign up on one of them.