How To Get A Loan To Finance A House Flip

Although house flipping is my primary business, I also work as a blogger, real estate broker, and landlord. Flipping 20-30 houses per year without financing is impossible. Many people have asked me why I don't pay cash for all my flips. It is because I can flip three times as many houses with financing as I can with cash. Cash is not the best option. However, I can make more money with one flip. This article will discuss how you can finance a house-turning project using banks, private lenders, and partners. It also includes crowdfunding and owner-occupant loans.

Is it possible to finance a house flip using a conventional loan?

It is easy to find financing for owner-occupied or long-term rental properties. The banks love to finance properties expected to be held for many more years. Banks also love to lend to owner-occupied buyers, as they believe that owner-occupied buyers are more likely to be able to weather the tough times.

Short-term loans are not popular with banks because they earn interest and stop making money once the loan is paid off. The majority of house flips are sold within a year of their purchase. Long-term loans can usually be paid off before their term ends. Most loans come within 30 years or 15 years. Although the loans can be paid off quickly, banks don't like to see them paid off within a year. Although you may get a long-term loan soon with a flip, if the loan is paid off in full and the bank has seen that you have paid it off promptly, they will not lend you another loan. Every bank can see the early loan payment on their credit reports.

You are guilty of fraud if you attempt to obtain an owner-occupied loan for a house flip you have never lived in. While they won't pursue criminal charges against you, the banks will immediately see that you have sold the property and will likely not lend to you again. To start a business, obtaining short-term loans for house flipping is essential.

There are many types of fix-and-flip loans.

There are many types of short-term funding. Short-term financing can be done with hard money, private money, or portfolio money. Because it is riskier and has a shorter time of interest collection, short-term funding tends to be more costly than long-term financing. Many banks won't lend money on house flips, particularly the large banks. However, smaller banks may. One-year loans are available for house flippers. Short-term loans for house flippers are also known as hard-money loans. Private money can be borrowed from regular people and come in many terms.

Hard money

Hard-money lenders offer short-term financing for as little as one to two years. Although they can provide flexible terms, hard-money lenders are very costly. Hard money lenders typically charge between 8 to 14% interest and 2-5 points. A point is one percent of the loan amount and is charged at 1 percent. Often, the hard-money lender won't set these points until the property is sold and the loan is repaid.

Hard money lenders do not work for banks but instead for investment companies. They borrow money from investors at a lower interest rate than they lend house flippers. While they are not subject to many of the same regulations as banks, they are still required to follow specific rules. Hard-money loans are not available for owner-occupied homes. They can only be used to purchase investment properties. Hard-money loans are a great way to buy a property without borrowing money. After repairs have been made, the loan can be based on the property's value. You cannot base your loan on the purchase price of other loans.

If I wanted to purchase a house for $75,000, but it was worth $150,000 after repairs, the hard-money lender would base the loan amount on the property's value. This means that I could finance both the purchase price and some repairs. This is an example of a hard money loan that will finance a house's 65% (after-repaired value).

Purchase price $75,000
ARV: $150,000
Repairs required: $30,000
A loan amount equal to 65% of the ARV = $97,000.
Finance could be available for the entire purchase price and $22,500 for repairs.

Hard-money lenders prefer to have some equity from their investors. This means they won't lend 100% of the cost because the borrower is less likely to accept the deal if it doesn't work out. This hard-money loan would cost $3,900 for the 4 points and $6,825 if the interest were 14% over 6 months. The hard-money lender may require appraisals or other fees. The hardest-money lenders who will pay all costs will have the highest rates and most points.

Why would investors prefer to invest in hard money?

Investors will pay high-interest rates for hard money loans because they don't have any other options. Short-term financing is difficult to obtain from banks. That is why hard money is needed. Although you can get lower rates from a bank, you will still have to pay for repairs and a 25% down payment. Higher interest rates are associated with financing more of the deal.

What is the average cost of a hard-money loan?

The typical hard-money lender will finance 90% of your purchase price and 100% for repairs. Hard-money lenders won't give you all that money upfront. The lender will pay the money out in monthly draws. Once some work has been completed, they will inspect the property before paying you. Hard-money lenders will charge these draws. The lender doesn't always worry about an investor's credit score, debt-to-income ratios, or any other factors banks worry about. This is another advantage of hard money loans. Here is a video explaining the different financing types I use and how much it costs me.

How can you find a lender who is willing to lend hard money?

It is easy to find a hard-money lender. Google will return approximately 1,000 results for hard-money lender searches. The most challenging part is finding a hard-money lender with reasonable rates, who lend in your area, and who is experienced. Hard-money lenders can charge up to 15%, and some cannot perform when a deal is at stake. As a real estate broker and investor, I have witnessed many deals fail because of a bad hard-money lender. In the past decade, there have been many large hard-money lenders. Finding a reliable, hard-money lender is much more accessible than ever.

Many companies call themselves hard-money lenders, but they do minimal lending. Many hard money lenders tend to be localized in one state or one region of a state, where they are familiar with the market. Some larger hard-money lenders can work in multiple states and offer lower rates than the typical hard-money lender. Many smaller hard-money lenders charge 15% or more. However, larger companies are often more affordable. These companies can charge lower rates to real estate investors because they get their money from large hedge fund managers who don't require as much return as smaller investors. Rates for larger hard-money lenders can be as low as 8% with 2-4 points.

Local hard-money lenders

I recommend that you only work with local hard-money lenders if you prefer. Referrals are the best way for you to find trustworthy business partners. These are some ways you can find hard money lenders.

Ask around at your local investor meetup. Many times, lenders with hard money will sponsor the meeting and speak.
Ask your lender or real estate agent if they are aware of any hard-money lenders. Although there is a chance that they don't know of any, it doesn't hurt to ask.
You can also check out online communities for real estate investing.
You can search online but be careful. One of our buyers used a hard-money lender to finance a HUD deal. They could not produce proof of funds to prove they had the money to loan to the buyer.

If you're looking for hard money at a lower price from large, national companies, I have a list I know of that is legitimate. I've used several of these companies myself. Private money is my preferred option, but bank money is also an option. However, hard money is possible for some investors. You can get better rates and terms the more deals you do.

Private Money

Private money is used to finance a part of my fix-and-flips. Private money comes from my family, friends, and other investors. This money is used to pay the mortgage, repair, and buy the house. Private money can be a loan, investment, or gift from family members, friends, coworkers, investors, or other people. The trust and personal relationships that are involved in the loan are critical.

Private money used to finance fixes and flips

Private money is usually found in the form of friends or family members who lend you money at a higher rate than what they would get from a bank or CD. The private-money lender is a term used by many hard-money lenders. This is a marketing tactic because many new investors believe that private money is the best way to invest in real estate. Don't be fooled by private-money scams. I will discuss these shortly.

Private money is only available to people with a lot of money willing to lend it to investors. Private money can be sourced from family members, business partners, and other real estate investors. Anyone with cash. It is difficult to ask for private capital and to find people willing to lend it is even more difficult. Personal money rates can range from 0% (mostly a parent wanting their children to be successful) to 12% and higher. Rates will vary depending on the return the lender is looking for, the price the investor is willing to pay, and then taking the risk.

Why would investors choose private money over public?

When I flip houses, I use a mixture of financing. There can be up to 22 flips at once. I need a lot of financing to make that happen. House flipping is a lucrative business. I typically pay $150,000 to $250,000. After paying for the down payment and repairs, I typically have $75,000 in cash left over after using bank financing to finance each flip. To complete 10 flips, $750,000 would be the minimum amount of cash I need. Many of my flips require $50,000 in repairs.

Private money and credit lines allow me to flip more houses and make more, even though the financing costs are higher than those at the bank. Flippers may only use private money to finance their flipping ventures. You may require cash as soon as you win the bid at a foreclosure auction. This is something that most banks and hard-money lenders are unable to fund. Private money lenders can support deals immediately and have flexible terms that banks and other hard-money lenders cannot.

Hard-money lenders and banks will have guidelines about what they will lend to flips. They won't lend more than a specific amount of the purchase price or the value after repairs. Private money lenders may lend to the total purchase price, including all repairs. If I need to borrow my money, I have to send an email or text to the lender and tell them about the deal. Usually, they will confirm that they can complete the deal the same day, as long as funds are available.

How can you locate a private-money lender?

Private money is essential for growing a flipping company, but it can be challenging to find. These are the top roadblocks that prevent you from finding private money.

Because they fear losing their money or being rejected, investors don't want to ask their family and friends for help.
Investors don't know anyone who has a lot of money and could be a private money lender.
Private money lenders are not willing to lend to investors without experience flipping houses.

It can be difficult, but not impossible, to overcome these obstacles. These are some suggestions:

You are not in the right business if you fear rejection. Real estate is not immune to rejection. It's not the end. You shouldn't be afraid of losing your money to people you know. You might need more education or experience if you aren't confident you can make it.
There are many ways to meet people with cash if you don't already know them. You may be aware of people who have money but don't know them or are afraid of asking them. You should list all people you know and any connections they may have with anyone who might be able to help you.
It is difficult to start if you have not flipped a house before. Find excellent deals to attract lenders' attention. A deal that is so great that the lender will not hesitate to approve it is a fantastic deal. The lender may be able to take back your home even if you make a mistake and are unable to repay the loan.

You have other options if you don't find anyone with money after going through all of your contacts. You can find investors who will always lend money to flippers, and they are most likely in your area. How can you locate these lenders?

A Deed to Trust is used to record a private-money loan against a property. A Deed of Trust recorded against a property becomes a public record, and everyone can see the lender's identity. You can search for flipped properties (either recently sold or put on the market) and public records regarding private-money loans. A real estate agent can easily access public records about properties and find out what loans are attached to them. To see the original Deed of trust, I can visit the county website or call the title company to request a copy. List Source can be used to locate properties that have private-money loans attached. This technique allows you to find investors willing to lend money to flippers in your area. The first step in the process is finding investors willing to lend money.

Scams with private-money loans

Private-money loans are the subject of many scams. This scam involves someone pretending to represent a private-money lender and offering a low-interest rate of 5%. They claim that the loan can be as high as $20,000,000 and will fund within 5 days. They don't conduct a credit check and are not concerned about bankruptcies. They require an application fee if they successfully get someone to apply for the loan. It could cost $50 to $500. The price will be paid, and the borrower will not hear from the private lender after that.

It's easy to spot a private money scam. With a low-interest rate and large amounts of money available to lend, the terms sound too good to be true. People with this much money won't lend it to strangers at meager interest rates. They will also require you to pay an application fee to get started. Because they know that you can cancel those charges if you discover it is a fraud, they won't want you to send it via a credit card or PayPal. These lenders are most common on Facebook, particularly in real estate groups. Fake lenders can be identified because they are new to Facebook and have few friends. Although it is evident that the lender is affected, people still fall for it.

How much does a portfolio lender charge?

My portfolio lender loans me up to 75% of my purchase price for flips. This loan requires me to make a down payment and cover repairs. Portfolio loans require me to invest more money, but the interest rates are lower than hard-money loans. My loans with local banks cost me 5.25% plus 1.5 points. A loan can be completed by my lender in less than two weeks. No appraisal is required for loans below $150,000.

Although I use financing to purchase flips, the cash offer is written by me. A cash offer is often more appealing to sellers because of the competitive market. Because I don't include appraisal contingencies or loan conditions in my request, I can offer cash. I can pay cash if I need to, but I also have the option of borrowing money to purchase more properties. I agree to use a local or private bank loan. However, I can pay cash for any additional expenses. Bank terms can be very different.

Some investors have local banks that will finance repairs, while mine won't. Investors with lines of credit with local banks to finance house flips without collateral are still available, but mine won't. We had an $800,000.00 line of credit with our local bank before the housing crisis. It was unsecure except for the houses we were flipping. After the collapse of the housing market, those lines of credit vanished. Many banks closed down. We did okay and never missed any payments.

How do you find a portfolio lender?

Local banks can finance flips, but not all banks will do it. Many big banks won't even consider funding a flip. Small banks also won't touch them. Even if you find a small bank willing to finance flips, they will only work with experienced investors. A new flipper may not be able to start with a bank until they have completed a deal. Ask around for recommendations from title companies, investors, and agents. Cold calling local banks are also possible, but you should be prepared not to be told more than once. Sometimes, you might be told yes by one bank employee. You need persistence and hard work to find great financing to flip houses.

Crowdfunding

Crowdfunding involves investors pooling their resources to support a project. With as little as $5,000, investors can fund a project. Crowdfunding companies will help find investors and tasks for them to invest in. They also take a percentage of the profits. Crowdfunding works much the same as hard money in terms of the rates and phrases offered to house flippers who want to borrow money. Crowdfunding for house flipping has fallen because hard cash is becoming less affordable in recent years.

How Does Real Estate Crowdfunding Work

There are many types of crowdfunding platforms. You can research to find the best platform to meet your needs. These are the top factors to consider when selecting a venue.

What is their strategy? Each platform has its business model and approach, which drives the type of deals it funds. This information should be available on their website and the contracts they have funded. Trying to work with someone whose business model doesn't align with yours will be futile. Most likely, they have an investor base and underwriting structure set up to partner only with certain types of developers and their deals. They will not be interested in working with you if your deals aren't within their target.
What are their Underwriting Requirements? You can also review their deals to gain a better understanding. If you have any questions, you can always give them a phone call and ask for their underwriting requirements. Most platforms require that the developer contribute equity to any deal. They may not be able to help you if you don't have sufficient capital to invest in each sale.
Is it for the long term? This question is multifaceted. Their strategy is the first. Is it possible to believe that your business model will be the same as theirs in a year? Are residential fix-and-flip properties a viable asset they intend to offer shortly? You may not want your time to build a relationship with them. You should also ask yourself if you believe this company will still exist in a year. There are new companies in this industry every week. To better understand whether there is a problem, take some time to get acquainted with their management team.

It is essential to think carefully before you decide to use crowdfunding for capital. You can maximize the return on your investment to capitalize on this exciting new development in real estate investing.

Why would investors choose to crowdfund?

Crowdfunding is less popular than it was in the past. One real estate crowdfunding website went bankrupt recently. Crowdfunding sites are finding it difficult to lower their prices as hard money becomes more affordable. A crowdfunding project can take longer than it would for a hard-money lender to approve and fund. They are less attractive than hard money if they are more costly than hard money. Crowdfunding projects are available for significant commercial or rental property developments. These may be more attractive than hard-money lenders might not be willing to fund.

What is the cost of a crowdfunding platform?

Crowdfunding sites usually charge 10% to the investor. The riskier the deal, the higher the fees. They have had to lower rates to compete with high-interest lenders.

Refinance with cash-out

Flippers also have the option to tap into their existing equity in real property. I refinanced my house and several rental properties to get cash to fix and flip loans to new properties. You can borrow up to 95% of your personal home's value from some banks in the form of either a line of credit or refinance. While the refinance is more costly, it will provide a long-term solution. Although the line of credit is cheaper, it will have a shorter term and a higher variable rate.

What are the requirements to be eligible for refinancing

A line of credit can be qualified similarly to a regular mortgage. The bank will require a good credit score and sufficient income to support the loan amount. Different banks will have additional requirements. Equity in your home is also required. Equity is the difference in your home's value and what you owe on your home. Different banks will allow different loan-to-value ratios. It also depends on whether you are investing in property or a homeowner.

HELOC – Home equity line credit

My home equity line of credit has a variable rate of 2.2% above the Wall Street Journal prime rates with a floor rate of 5% and a maximum of 21%. The rate currently stands at 5.25%. I was able, however, to increase my loan-to-value ratio to 90% on my primary residence. There are no monthly or annual fees and interest only on money borrowed from my home equity line. It was very affordable because there was no appraisal. My home was valued by the lender using one of their models. It was free. I could have requested a review if the bank's estimate was too low for me. I hoped it would come in higher. Recording fees, flood certification, and title fees were my only expenses. The home equity credit is valid for five years, and all payments are taken directly from my portfolio lender's checking account. I can pay as much or as little as I like.

HELOC for investment properties

While banks are happy to lend lines of credit for personal homes, they will not be able to do so for investment properties. You will likely need to locate a local portfolio lender to get a line credit for an investment property. My bank views this as business credit, and the terms may differ from those for your residence. However, the bank does not need an appraisal and can still use its valuation system. All of the properties were valued very low when I checked them. This could be because I purchased the properties in the last few years for less than what they are now worth.

Business lines of credit have different terms. The bank will offer three years for an investment property, with a maximum 75% loan-to-value ratio. Prime + 2 will be the rate, with a floor rate of 2%. The fees are usually 1% origination and any applicable third-party fee (i.e., title, filing, flood, appraisal). The HELOC for investment property is certainly more costly than a personal residence. These are the rates for my local bank. Rates may be different at other banks. My bank requires a one-year seasoning period. This means they base their loan amount on the last sold price and not on an appraisal if the property was bought within the past year.

What are the drawbacks of a home equity credit line?

You will be considered in debt if you get a personal or business line of credit. Your debt-to-income ratio may rise so that banks won't lend you money. Talk to your lender if you're considering a line of credit but are concerned about your debt-to-income balance. They will run the numbers to ensure the credit line doesn't cause more damage than good. The home equity credit line gives real estate investors a lot of flexibility, regardless of their investing type.

I am a big fan of flipping and long-term rental investments. Investors can access credit lines to get cash to repair, purchase properties, or pay for carrying costs. A real estate investor's success or failure can depend on having enough money. Refinances can be used similarly, but they will have longer terms and more stable rates. Refinancing will have higher costs, and you can't borrow again from it after you pay it back.

Conclusion

Although there are many options for financing flips, it does not necessarily mean that it is easy to obtain financing. Although it is possible to flip houses without much money, this is not easy. Knowing what you do is key to getting funding. You must also be able to demonstrate to your lenders that you understand what you are doing. My book, Flipping, covers everything you need to know about buying, selling, financing, and selling properties.