Flipping homes can be very lucrative and rewarding. Many people would like to try their hand at real estate investing by flipping homes. The number one roadblock for many new investors is where to get the money to start flipping. The question that is always asked can you flip a house with no money? You can flip homes by using other people’s money (OPM) to buy and rehab the homes. The other way to flip a home is to wholesale it to another investor.
There are several ways you can buy homes to rehab and flip with no money down or no money out of your pocket. We will need to look at the different ways you can do this.
You can work with a partner to supply the money to buy the home and rehab it. You can look for a partner anywhere from a high school buddy to a work associate. The key is to network with all your friends, relatives, and business associates to find the right partner.
Put a list together of anyone you know might have money and wants to make extra cash.
- Business owners you may know
- People at church you are friends with that you know to have cash
- Any doctors that you visit that you think you can approach
- Wealthy people you may be friends with
- Maybe contact some old college or fraternity buddies to see if anyone has the cash to invest
The deal can be structured in a few different ways.
- You have them pitch in the money and you manage the rehab work for 50/50 split
- You may be able to also do like a 60/40 split since you are doing a majority of the work with buying, rehabbing and selling the home
You can work with this partner deal by deal to not lock yourself into a long-term partnership. They may want 50/50 and you are ok with that the first two to three deals. The thing is once you have more capital and experience then 50/50 split may not be so good for you. If you are locked in a partnership it will be tougher to get out of it.
This one is easy to figure out so if you get a loan for a house for $200,000 and you are able to rehab then sell for a profit of $40,000. A 50/50 split would give you $20,000 profit which is good money but not as much as you might have made using hard money or private money.
2 Private money
This is similar to partners but with private money lending, you will be giving points and an interest rate. The same people for partners can be used for this list. The great thing about doing it this way is that you do not have to give up as much profit usually. The partner may want to be involved in every aspect of the flip. The private money people usually are more hands off and just providing the money secured by the property.
- They can provide the money and you maybe offer 10% to 15% return on their money
- If they do not like that deal offer 1% to 2% points and 10% to 12% return on their investment
- You can structure these in many different ways. You want to make sure the deal works for you and the private money lender
- You can usually get better rates and fewer points with private money then you can with hard money lenders
There are some creative ways for the private money lender to use their money to help with deals. They can use a home equity line of credit, an IRA or their 401K to buy the home. You can consult with a real estate accountant or lawyer to learn more about how to use these tactics.
This type of deal you do not want to give them points if you can avoid it when negotiating. You just want to give them a flat percentage to pay. Let’s look at the numbers and you will see why.
You find a friend to use their home equity line of credit to buy and flip a house. The deal you negotiate with them is to pay 11% with no points secured by the home. The rehab took 5 months to complete and sell.
11% Loan Cost Calculation
$200,000 x 11% = $22,000 divided by 12 month = $1,833 x 5 months = $9,166
No Points Cost
Total cost = $9,166
Use a private lender 401K to buy a house to rehab. Maybe you know someone that has a large 401K and would use it to help you buy a house to flip for profit. Here is another scenario you may want to look at for the deal.
8% Loan Cost Calculation
$200,000 x 8% = $16,000 divided by 12 month = $1,333 x 5 months = $6,666
1 Point Cost
$200,000 x .01 = $2,000
Total cost = $8,666
You can see by looking at the two deals it is better to not pay the points.
3 Hard money lenders
This is a popular way to buy homes to flip. Many flippers use a hard money lender to do their deals. These are investors that do real estate investing with other investors in the area. They take their money and lend it out with some high fees and interest rates. Most lenders will ask for a down payment of 10% or more so if you truly have no money you will have to use a private lender for the down payment. The typical hard money lender will do this kind of deal.
- You will have to usually pay points on the loan. I know my hard money lender charged me 3 points for the loans we get
- They usually charge between 3 to 6 points on the loans
- The rate is will usually be 12% to 25% depending on who you go with on lending
- You will need 10% or more down to do the deal
You borrowed $200,000 from a hard money lender at 15% with 5 points. It takes you 5 months to do all the rehab and get the house sold. Let’s do the math to see how much you would have to pay.
15% Loan Cost Calculation
$200,000 x 15% = $30,000 divided by 12 month = $2,500 x 5 months = $12,500
3 Points Cost
$200,000 x .05 = $10,000
Your total cost for borrowing the money for the 5 months is $22,500
This is why it is critical that when flipping homes you try to do the rehab as quick as possible. Every month you carry the money your costs go up. Let’s see the cost if we flipped the house in three months instead of 5 months.
15% Loan Cost Calculation
$200,000 x 15% = $30,000 divided by 12 month = $2,500 x 3 months = $7,500
3 Points Cost
$200,000 x .05 = $10,000
Your total cost for borrowing the money for the 3 months is $17,500
Subtracting the two months off rehab and selling gave you $5,000 back into your pocket. Now you see why it is so important to have a system to get these flipped homes sold quickly if you are using lenders.
4 Use your own money
I know the title says how to buy a home to flip with no money. No money is a vague term the way we are using it in this article. You may have a large 401K or a ton of equity in your current home that is just sitting there. You can use the money you have tied up to make a purchase and do the rehab.
Think about it you are still doing it with no money from your bank account or your checking account. You are betting on yourself that saved money in assets can be used to make more money for you and the family.
There is a risk with anything you do but you would have a ton of control when doing the first flip. This is just one strategy you can look at and I know it’s truly no money down venture.
5 Wholesale the property
If you are new to real estate investing many newbies will look to start with wholesaling properties. You may be asking what is wholesaling.
Wholesaling is just about finding a super discounted house that I can lock in with the sellers to sell to me. I then pass on those savings to my list of buyers that are looking for a good deal. I get the profit in the middle between what price I negotiate with the seller and the price I sell to my list of buyers. This makes things easy if you are new because you are not buying the property for flipping or as a rental. You are just being the middle man and you get paid really well for it.
You are probably asking how much can you make at wholesaling. The amount you make depends on how good you are at negotiating deals with people who are selling and your list that is buying. You may not be awesome at first but every deal you do will see your skill set grow. I’ve had made in my time wholesaling anywhere from $500 to $10,000 on really good deals. The average would probably be somewhere in the middle is how much I make on the deals I have done.
You should not turn your nose at the lesser profit. You do 4 or 5 wholesales a month you can make good money. They key is to set up your pipeline of leads so you always have a stream of homes to work with for wholesaling. I will not go into setting up the lead generation machine for wholesaling that will be another article.
You need to make sure when buying a house wholesale that the properties after retail value (ARV) is accurate. You do not want to get a house in contract only to see the (ARV) of the home is $10,000 less than you had calculated. That would easily be your profit and would likely make it so the deal would not work for your list of buyers. You really need to know the market you are in when buying wholesale.
Can you do wholesaling in your spare time?
You can easily do this in your spare time if you are willing to put in the work. The great thing about this side job is not only the extra cash but you also have a way to make money if you ever get downsized. You know how corporate America works you are always expendable to most companies. You do need a system set up to do this in your spare time. This is not something where you do a few things a week and presto you have a $5,000 deal ready to go.
Like anything in life when you are new to something, it will require time to learn how to wholesale. You will also need time to set up the system. Once you have a system in place and have worked out the bugs it can save you time while boosting profits.
The things we discuss above do work and are real. This is not a get rich quick deal where you buy the first house with a discount and you are raking in the cash. Deals to make money require you to set up a system, follow the system, tweak the system and then cash the check. You have to think outside the box on most of the deals to get them to work. To start you just need to do it, get the lead system going and find your first home to flip or wholesale. Once you do that you just repeat and scale to the size you want.