House flipping is a lucrative business which can provide a steady income for you. However, this business can be quite difficult. There’s a lot that goes into the business other than just buying and selling a house. There are numerous challenges, but the biggest one is finances.
House-flipping requires a lot of money, but in this article, you’ll learn of the costs involved in this business and where you can get funding to finance these activities.
Before you dive into the house-flipping business, you need to understand the various costs involved. There’s more to buying and selling a house for a profit. 90% of all homes will require flipping before they are listed. Here are some of the costs you can expect to encounter.
- The cost of buying the house.
- The renovation costs
- Inspections by relevant authorities
- Realtor fees, closing and holding costs.
- Loan fees and interests
- Deposits on loans
There could also be potential to need Global Guardians for protection, should your property take a while to sell. Now that you know what to expect regarding costs, let’s take a look at where you can find funding for your flipping business.
Ways to Finance House-Flipping
- Private Lending
Private lenders can offer you the amount you need starting from the purchase of the house to the costs involved in the rehab. Since flipping houses is a booming business, Use nation 21 loans to search for appropriate option since private lenders from them are likely to offer you the amount you request.
If you get everything spot on, this business can produce up to 12% ROI within a short period. If you choose this route, there’re a number of things you’ll need to have:
- A Promissory note: This document contains guidelines which the both of you have agreed to abide by.
- A deed of trust: With this document, the property is connected to the investment offered by the private lender.
- Hazard insurance: By ensuring the property you add another layer of security to the private lender’s investment.
How to Go About It
After you strike a deal with the lender, you’ll pay back the money and this can happen in two ways:
Through accrued interests – Rather than paying the investor every month, you can let the interests pile up and then pay off the entire amount after you’re done flipping the house.
Through monthly payments – You can pay up through monthly installments instead of waiting to pay a huge amount.
Where to Find Financing
Private lenders can be in the form of friends, colleagues, or family members. Borrowing from these people is beneficial in a number of ways, including low-interest rates and lenient terms. If you fail to secure the necessary funds, you can also consider marketplace lenders.
- Conventional Bank Loans
Banks and other traditional financial institutions offer mortgages to flip houses. You’ll then have to make payments until the house is flipped and sold.
How to Go About It
Keep in mind that this route is quite difficult. These institutions consider house-flipping quite risky and so, you might have to deposit about 20–30% on the house price. Besides, the banks will have to go through your financial history, including your credit score, to determine the risks you pose.
What’s more, you’ll have to indicate the intended purpose of the loan. In this case, you’ll be flipping houses and they’ll want evidence of success in the game. Finally, you’ll also have to provide proof that the house to be flipped is habitable.
- Crowdfunding Sites
Crowdfunding has appealed to a number of entrepreneurs in the recent past. For house-flipping, you’ll need to look for crowdfunding platforms which support real estate development.
According to Massolution, real estate crowdfunding hit about $2.5 billion in 2016 in the US alone. This means there’s a high probability of landing investor funding.
How to Go About It
In crowdfunding, some people contribute small amounts of money toward a project. This can be done in one of two ways, either as a loan or as equity, although this will depend on the site.
With a debt crowdfunding website, investors will buy into a project and you’ll have up to 36 months to repay the loan. The interest rates are quite fair, starting at 8% all the way up to 14%. You might be charged origination fees by the site and you’ll make monthly payments to the investor.
With equity crowdfunding, investors buy the house to be flipped. After it’s sold, the investors will split the profits amongst themselves. Sites which offer such crowdfunding only allow investors ready to contribute at least $5,000.
- Use Your Resources
Your resources can come in handy when all other options fail. It’s not often that people have huge amounts of cash lying in wait, but there’re ways you can get the money you need.
Where to Find Financing
The IRA
While you’ll have to face penalties for withdrawing money from your retirement account if you’re under 59 years, this can be a great option. You can withdraw up to $10,000 for your project. However, taking out money from your retirement account can limit your growth in the future.
Credit Cards
You can use your business or personal credit card to fund a flipping project. The only limitation is how fast you can pay up the debt. Also, you’ll have to contend with the high-interest rates which range from 18 to 20%.
Home Equity
If you have a home, you can use the equity to fund your flipping business. Using your home equity as a line of credit means taking out a second mortgage and you’ll pay back the loan using a fixed interest rate.
However, you need to keep in mind that your house serves as security. Should you fall behind on payment, you could end up with a foreclosure.
Which is the Right Route for You?
Whether it’s private investment, crowdfunding, traditional lending, or using your own resources, it’s important to find a funding solution which caters to all your needs.
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