Recent research found that house flippers were responsible for renovating more than 200,000 homes in 2017. When you consider the average profit per property was approximately $68,000, you can understand how motivated fix and flippers are to acquire and sell their investment homes.
With this earning potential, it’s not surprising that so many people want to get involved in the business. But for many, not having access to large sums of capital presents a significant barrier to success in house flipping.
To make sure a flip project goes smoothly, investors have to have enough cash on hand to pay for the acquisition of the property, repairs, renovations, and other associated expenses.
Luckily, fix, and flippers now have multiple funding options for their residential purchases. Timing is everything, so having quick access to the funds you need helps position you for success in bidding wars or when offering buyout options.
In many cases, traditional bank loans are not always the best option for house flippers. Homes purchased by home flippers are ‘non-owner occupied” making it an investment property, and not a primary residence. And while there is plenty of money to get made as a house flipper, revenues and income from this type of home can be unpredictable.
For this reason, many traditional banks are reluctant to grant business loans for this purpose. If they are, the product may be unsuitable due to the length and terms of the loan. Ideally, house flippers purchase the home, make needed upgrades, and sell the home in a short timeframe to keep their projects moving.
Since traditional bank loans are often not the best option for investors, alternative financing like borrowing from family or friends, or tapping into a home equity line can work.
After establishing a successful track record fixing and flipping homes, the chances are good that you can find funding for your deals with Private Investors. Another option that may become available is a Business Line of Credit.
We’ll take a look at the advantages and disadvantages of each of these options.
Loans Or Investments From Family And Friends
If you’ve found an excellent opportunity to buy a house that needs TLC to turn a profit, it makes sense to turn to your network of family and friends for financing. By doing so, you can get the house, and each person has a vested interest in the asset. If your circle of financial backers is handy with doing repairs and other renovation work, they can ‘pitch in’ their skills to reduce the costs of repair. Ideally, you exit the deal profitable, and you pay back the capital (plus any interest or profit share) to the lenders.
Home Equity Lines
If you own your own home with equity, using a home equity line could be an option for financing your fix and flip deal. A home equity loan is a way to take money out of your house based on the equity you’ve built. In many cases, home equity loans offer lower interest rates than other financing options. Like all loan products, equity lines must get paid back, as per the terms of the agreement with the lender.
Business Lines Of Credit
Often reserved for experienced flippers and businesses with a steady operating history, a business line of credit extends capital to the owner or operator of the company.
While traditional home loans aren’t a good fit for the fix and flip funding, a business line of credit is an option for investors seeking funds to flip houses. A business or commercial line of credit extends a set amount in a credit line. Investors only pay for the money they use. As you can imagine, this makes a business line of credit ideal. These credit lines are similar to a HELOC. However, commercial lines of credit can extend into the millions of dollars, based on the company’s income and your history of completing fix and flips.
Remember that savvy and successful flippers use a variety of funding options to finance real estate acquisitions. As you become more successful at completing projects, opportunities for funding through private lenders and investors will likely become available for bigger projects.