You want to look at flipping houses but you need money to do it. The real estate market is booming so it will be easy to sell a home you bought to rehab and flip. The question is how do you find money to flip homes? The key is you need other people’s money to leverage buying a house to rehab and then flip for a profit.
I know you are thinking great thanks for the answer but how do I get other people’s money to buy homes to flip.
I had these same thoughts when I first started and how each investor finds funding may be a little different. Let’s go into some of the ways and means by which you can get funding for your house flipping venture.
If you are new and just starting to look at flipping homes things can be tough. Many investors and lending institutions like to see that you have flipped some homes or have some experience. If you are brand new then like we said it may be tougher to secure funds for the house you want to flip.
I am not saying this is impossible but I am letting you know it will require more work on searching and talking to lending resources.
The first place I would go is to a real estate investors meeting that you should be able to find locally. There are seasoned investors at these meetings and many can point you in the right direction if you just ask.
You would say something like, “Hi, my name is Dave and I wanted to talk to the local investors that flip homes. Can you point me to the house flipping investors in the group?” These seasoned house flippers will not give you all their secrets but on lending that is something they can probably point you in the right direction. If they use private investors, they will not give that up but other lending businesses give money and they may know one locally that will talk with you.
Online searching for lending
The age of the internet you can almost find anything online. You just need to type in the right keywords. I did a few searches online to see what we would get when I put in different keywords for loans to flip homes.
Keywords: Loans to flip homes
The first 9 articles had articles on finding the best funding options. Many of them talk about funding options but don’t really give you companies that offer flipping loans or hard money lender names.
Number 10 on the list gave me this heading: Fix and Flip Loans – LendingOne
The description on the website: LendingOne – who does 12-month fix and flip financing with competitive rates and can close fast.
Keywords: Hard Money Lenders Flipping Houses
You have the first four sites are ads for hard money loans. The next several sites on the top of the search page give me websites that will explain financing options and will not give you actual lenders to contact. If you are looking for hard money to flip homes, I am assuming you actually need a lender not more information on top lending practices.
Number 9 and 10 on the first page of Google gives me two companies that offer hard money to buy property to flip. The heading is Fix and Flip Loans Socotra Capital and the other one is Fix and Flip Loans – Low Cash to Close House Flipping Loans by DoHardMoney.
Description: Socotra Capital – Fix and flip loans have become one of our flagship loan programs.
Description: DoHardMoney – House flipping loans funded by a company experienced in an actual fix and flip investments
Keywords: Fix and flip loans bad credit
We typed this in for those with bad credit. We had the ads show up first on Google then we got mostly lenders or hard money lenders with the keywords above.
Number 1 and 2 gives us DoHardMoney and Sun Wise Capital for loans.
Description: DoHardMoney – House flipping loans funded by a company experienced in an actual fix and flip investments
Description: Sun Wise Capital – Are you eligible for a fix and flip loan without using hard money lenders?
You just need to keep searching and then contact these companies to see what you need to do to get a loan. Then you need the rate, points charged, the term and all other stipulations for the loans so you can see which one might best suit your needs.
Ask realtors locally who to use
I have a realtor that also has done real estate investing. He knows what is going on in my city, so I rely on him to help me find lenders or good contractors. He knows what is going on with my real estate market and he is well connected.
The point is to start using your connections or make new connections with people in real estate. If your connections do not know a good lender, they probably know someone that does.
Do you need good credit to flip houses?
This will depend on what you consider good credit. You may ask what is considered a good score. A good score is anything above a 700 score. The range for a credit score is between 300-850. The higher the score the better your credit rating for getting loans.
Very Good: 740-799
Very Poor: 300-579
Source: Experian Website
Good credit helps with getting loans but it is not the end all be all. You can go to private investors or hard money lenders to get loans. The cost and rates will be higher because your credit score is not as high as they would like.
Can you flip houses with bad credit
Yes, you can get a loan to buy a house and flip it if you have bad credit. You should be asking why you have bad credit and how should you fix it.
If you have bad credit this means you have some money management issues that you need to deal with before going into a big money business. Flipping a house takes a bunch of money to pull off. You may need anywhere from $100,000 to $1,000,000 for a property to flip.
This is much more money than getting behind on a credit card for like $2,000 or even $10,000. If you cannot manage a credit card with $5,000 limit are you really ready to manage $100,000 or $200,000. You need to really master understanding financials because that is the key to doing well in the house flipping business.
You need to know and manage:
- Rehab cost which can be anywhere between $10,000 to $200,000 for average flips, so the question is can you manage that and contractors
- You have hard money or private money costs, what if you went into a deal that had increasing rate if you have not sold the house in 3 months. This could cost a fortune if you are not careful
- Holding cost like water, taxes, insurance, electric and more, if this is not managed the cost can eat away at profits
Do you see what we mean when we say if you have bad credit it might be best to fix your financial skills before tackling a rehab project?
One thing you can do is find homes to rehab and wholesale them for $5,000 to $10,000 to a local real estate flipper. This way if you do have a credit card or other debt you can work to pay it off so you can shore up your finances. Once you are in better shape financially and have better credit then do a flip.
Getting a loan from a bank to do a flip use to be easier back in the real estate boom 15 years ago. The real estate boom now is good but not like 15 years ago. Banks are still tough to get loans from even with really good credit.
If you really want to look at banks then look to smaller banks or Credit Unions because they are a little more flexible with what they can do lending.
The great thing with banks or credit unions is their interest rates and points are much lower than getting a hard money loan or using private lending.
If you have a relationship in your town with a local bank then go to your contact first to see what they have available for flipping homes. Maybe they have some special loan packages to buy, rehab and resell houses.
I will tell you that the banks are more strict about how you use the money. You will need to submit what needs to be done in stages and after each stage, they inspect to make sure the work was done. Then if everything looks good they will release funds for the next stage of rehab. Most banks do 3 draws one to start the project one at 33% and the last draw at like 66%.
This is not for every bank but most make you do the rehab in draws.
I did these quite a few times back in the day but I found banks tough to work with so I switched to hard money and private investors on my properties and flips.
Partnerships are a great way to get started in finding money to flip homes. You really need to know someone that has extra cash that wants to make 8% to 10% on their money and it is secured by real estate. This is good for partners they make good money and if you default they just take back the house to sell so they can get their investment back.
It’s a win-win for everyone just as long as you do what you say you are going to do. You are in it to buy the house, rehab it and flip it for a profit. You pay back your partner the amount borrowed plus interest. They may charge a point or two but it is still worth it.
There are also partnerships where they are the financial means and you are running the buying, rehabbing and selling of the home. Then at the end, you split the profits. Unlike the above example where you only give them a percentage on the money borrowed, here you split profits.
If you made $20,000 profit off flipping the house then you would have to split $10,000 each. Not a bad profit but the first way would mean a bigger profit for you if you do the flip right.
The percentage route is better for you to make more money. The partner will probably tell you how they want to set up the deal. You may not have too much to say about the structure since they have the money. If the deal is not the best maybe do a few deals and look for better lending options as you get better at flipping homes.
Owner financing the deal is a bit tough because most people want their money and do not want to wait 3 to 6 months for you to rehab then sell the home.
You need to ask the homeowner just to see if they are interested. It never hurts to ask and the upside for you is great. You will have to get money for the rehab but at least you do not have to get money to buy the house. The owner is the lender for the short period you rehab then flip the home. You need to make sure you set the deal up correctly because you don’t want to rehab it and then they sell it to someone else after you did the rehab.
Consult with a lawyer on structuring this type of deal.
A deal like this would be structured in this way.
- Joe is selling his house for $80,000 and it needs some work because Joe has not been able to keep up with repairs
- Joe will extend a loan to Sam
- Sam will need to put like 5% down on $80,000
- Sam and Joe agree to a 6% interest rate with interest only payments for the 6-month term
- Sam has estimated it will take 4 months to do rehab and sell the home hence the 6-month term for wiggle room
- Sam will give a promissory note for the remaining balance of the loan after down payment
- Sam gets done with rehab and then sells it for a profit paying off the loan
- Joe gets a little extra profit and Sam makes his large paycheck by doing the rehab to sell at a higher price
- Everyone wins
- Remember have a lawyer set up this paperwork
If you can do this type of deal I would do it. It saves you from getting a huge house loan but makes sure the deal is structured so you do not get screwed over by the homeowner.
This is similar to getting a partner but usually, on money from private investors, it is a percentage of the loan amount plus points. Hard money lenders do it the same way. A private investor is not a partner and would not have a say in the rehab or flipping portion of the deal.
They just loan the money and expect at the end a return on their investment. They are usually higher than a partner maybe 10% to 15% and the points would be 1% to 6%. This is really similar to hard money lenders but you can negotiate more on the deal structure with a private investor than a hard money lender.
A private investor may not increase the rate on you if your credit is not great where a hard money lender will have a base rate and will charge more if you are a higher credit risk. This is my experience in the industry but ever investor is different so negotiate the best deal you can get.
To find private investors you need to network in your area. This would be tough to find a private investor online. Usually, only banks or hard money lenders are online.
Hard money lending
You can find hard money lenders online or in your local market. One of the flips we did we used a hard money company that was run by a guy that was good friends with my older brother in High School. You never know where you can find someone to lend you money.
Hard money loans are more flexible for those with bad credit. You will have to pay higher rates and more points the lower your credit score.
We had to have one of their team members look at the property to make sure it was a good deal before moving forward with the loan. They also give you money in installments and as you finish phases, they inspect after each phase to make sure the work is complete before releasing the next installment.
What will hard money lenders charge you:
- 8% to 20%
- Fees for putting a loan together and this varies each lender
- Points usually 2 to 5 on the loan
- Time limit on a loan usually 6 months to a year
- A down payment is usually needed
Here are some online hard money lenders we mentioned earlier in the post.
- Socotra Capital – Fix and flip loans have become one of our flagship loan programs.
- DoHardMoney – House flipping loans funded by a company experienced in an actual fix and flip investments
- Sun Wise Capital – Are you eligible for a fix and flip loan without using hard money lenders?
- LendingOne – who can provide a 12-month fix and flip financing with competitive rates and can close fast.
- LendingHome – offer short-term hard money loans
Do hard money lenders check credit?
Yes, they will look at your credit history to determine your fees. The lower your credit the higher your cost to borrow money. You have to look at it from their point of view you have bad credit so you are not the best at managing money. I know that may not be fair because maybe it was a huge medical bill you could not pay but the system is what it is.
Hard money lenders will also check on your credit report if you have any foreclosures, bankruptcies, charge offs, and collections. They are looking for red flags that make them think you will not be able to pay them back. The more strikes you have against your credit the harder it will be to get a hard money lender to lend you money.
It’s a risk and reward business with some risks being too great for the reward.
Do hard money loans show up on your credit?
Usually, a loan from a hard money lender will not show up on your credit report because that costs money for hard money lenders.
If you stiff them on the money they gave you for the flip then they will come after you and may send a collection agency to get their money. They will definitely try to take the house back to resell and make their money back.
If you do what you agreed to then nothing should appear on your credit. The hard money loans I have received never showed up on my credit reports. If you are worried about it check with the hard money lender before getting the loan.
Do hard money lenders require a down payment?
Yes, most hard money lenders will require a down payment.
Many will require a down payment from 10% to 20% depending on your lending history.
They are taking a risk if they have not given you a loan on previous deals. They will look at your credit and history with flipping homes to see how much to charge you on a down payment.
- DoHardMoney – House flipping loans funded by a company experienced in an actual fix and flip investments. They will usually not charge a down payment so you can check them out if you do not want a down payment
What is the average interest rate on a hard money loan?
We mentioned it earlier but to answer the question directly they charge you 8% to 20%. I would stay away from anything over 13% unless your credit score is really bad or you have a bunch of things on your credit report that is bad.
The lower the interest rate you can get the more profit you can make after selling the home.
If you have bad credit it is better to pay higher rates to do the deal then to walk away and make nothing.
Let’s say you find a good property that you can make $25,000 profit but you need to get a loan and you have bad credit. If you pay a few % points higher on the loan you may spend an extra $1,000 or $2,000 for the hard money loan.
The thing is you will still make $23,000 to $24,000 on the deal. Who cares if you have to pay more to get the loan? Look at the big picture not at the $1,000 to $2,000 extra cost.
Can I buy a house with no money out of pocket?
It is possible if you use financing below.
- Banks or credit unions you may be able to roll costs into the loan but most would want you to have some skin in the game. Check with local banks and see what they require. I have learned smaller banks are more flexible.
- Private investor – if you have a rich friend that can invest then they may not require you to have any money in the deals.
- Partner – a partner who is just doing the financing and you are the rehab/flip expert you would not need any money down. It depends on the agreement you set up with the partner.
- Family and friends – if you have some wealthy relative you can treat them like a financial partner or an investor just giving money for a percent return. This would require no out of pocket money.
The creation of the Solo 401(k) you can purchase, hold, or flip real estate. The Solo 401 (k)is also known as self-directed or individual 401 (k) plan.
You can buy:
- Home to flip
- Commercial property
- Residential property
This Solo 401 (k) plan if you buy real estate through it, do rehab and sell for a profit, all that gain is tax-deferred until you decide to take a distribution. If you wait till 70 and a half to take the distributions then on the Solo 401 (k) the gains are taxed when you take the distribution.
Any gains you get from flipping a home using your Solo 401 (k) will flow back into your plan tax-free.
Let’s say you are 50 years old and you flip a house in the Solo 401 (k) and you make $20,000 profit.
That profit goes into the Solo 401 (k) but is not taxed at that time. The $20,000 will continue to make you money until you decide to get the distribution at retirement.
This is a powerful way to combine real estate and a 401 (k) retirement vehicle.
A home equity line of credit
This is pretty straight forward. You have been in your current home for a while that has a bunch of equity. You can set up your primary residence with an equity line of credit. If you own rentals it is tough to get an equity line of credit on rentals.
I currently have a credit line on my home that I can use for rehab on a flip or help buy a home to flip.
This money, once the line of credit is set up, makes it easy to have access. Most lines of credit will send you a checkbook to write checks when funds are needed.
This is equity in your home so if you use it to flip a home then make sure you put it back once you sell the property or make the money back from whatever you are doing. Do not use the money and then never pay it back.
When applying for the loan they will only give you up to 85% of the loan to value ratio of your home.
If you have a $0 loan balance on your personal home and the house is worth $400,000. Then you take 85% of $400,000 and you could get a line of credit of $340,000.
The 85% is an average some lenders will be able to do a higher percentage and some may be lower.
Home equity lenders to look at:
- Quicken Loans
- Lending Tree
You can check out our mortgage calculator to see payback examples.
Friends and family
You can go to friends and family but you need to make sure you know what you are doing before risking family money. If you happen to buy the wrong property and end up losing a relative’s retirement savings, that would be not good.
Borrowing money and losing it from a family member will ruin relationships.
I would start with hard money loans or a bank to start. Once you have a system that works for you, then you can look at family money. Family members would be excited to make 8% to 10% on their money or even partner with you to make a percentage of the profit.
There are several ways you can structure financing to do deals in real estate. You have to think outside the box and rejection means you just have to keep trying. You can take several financing options we give above and combine them to get a deal done.
I remember taking equity out of my one home to buy a rental property. I then sold that rental two years later for a $44,000 profit. That deal would have never happened if I did not pull equity from the one house.
Find the house you want to buy and make sure you have financing lined up with any of the methods we give above. Good luck flipping.