Purchasing a property with the intention of flipping it for resale or business use is a common endeavor. While the entertaining house flipping shows on TV might make it look like a walk in the park, flipping houses is often easier said than done.
Fix and flip projects require significant capital to be able to not only purchase the property but also front construction and material costs. Realistically, the most challenging part of a fix and flip project is obtaining the financial capital to make it a reality.
While it may be a challenge to secure the funding needed to get your project started, it’s hardly impossible. With alternative lending the future of finance, you have more options than ever to find the funding your project needs to get off the ground.
Home Equity Line of Credit
A home equity line of credit works similarly to a credit card. It involves a second mortgage that uses your home as collateral. This option allows you to withdraw funds as needed and pay them back over time at a set interest rate. As is the case with a credit card, as you repay the balance, the funds will replenish.
Banks offer a line of credit based on the value of your home or property. Depending on your credit score and other factors, current rates range from 2.49 to 21 percent.
This financing method is likely best suited for long-term projects rather than investors looking to quickly flip a property for resale purposes. Since you have to pay your balance to replenish funds similar to a credit card, it may be a challenging solution for projects that require higher upfront costs.
Hard Money Loan
Hard money loans are issued by private investors as opposed to traditional loans backed by banks. They are typically shorter-term loans, typically 6 months to a year-long but may go up to as much as five years. Additionally, hard money loans typically have higher than average interest rates ranging from 8-15%.
The upside of pursuing a hard money loan is that in some cases private lenders may be more likely to grant loans to borrowers with lower credit scores than traditional banks allow. Additionally, they often don’t require the same extensive paperwork as banks usually do so the process of receiving the loan is often quicker than that of a bank.
If the value of a commercial property has increased since you purchased it, a cash-out refinance may be a good option for you to pursue. This method allows you to utilize the equity of your home by refinancing your mortgage for a higher amount than you currently owe and withdrawing the difference in cash.
The outcome of this method is that your new loan will be the original amount that is still owed on your original mortgage, PLUS the amount that you took out in cash. We’ll provide an example: Say your existing mortgage has a remaining balance of $500,000 and you want to cash out $500,000 for an upcoming project. You would replace your existing mortgage loan with a $1,000,000 loan and use the extra $500,000 for your project.
The downside to this option is that you still have to pay closing costs which are often 3 to 6 percent of the total loan amount. Additionally, if you refinance to a higher mortgage rate, you may end up paying more in interest rates over time.
Crowdfunding, also known as “peer-to-peer lending” involves raising money through a series of large or small investments from multiple different people. On a case-by-case basis, this may include investments from family or friends or internet sites that help borrowers solicit the funding needed for their projects.
Investors involved in crowdfunding typically either make their money back in interest payments or by sharing the profits from the project. As it’s still a relatively new option for financing, crowdfunding is considered by some to be particularly risky.
Traditional Bank Funding
Last but not least, is traditional bank funding. Traditional bank funding tends to be less common for experienced house flippers due to the often higher rates. Additionally, some banks may charge penalties for borrowers that pay off loans early. Traditional bank financing is also based largely on your personal credit score and debt to income ratio. While the project your financing may be business-based, some lenders are wary of lending to individuals below a certain threshold.
As real estate fix and flips continue to gain popularity, so does the need for the availability of capital. Luckily, in combination with alternative financing becoming the future of finance, borrowers have more options than ever when deciding where to obtain the capital needed to start their new projects.
Innovative Capital is positioned as an ideal partner for fix and flip investors being that we offer multiple variations of lending options under one brand. Our experienced loan officers have close partnerships with private hard money lenders in addition to independent lenders and traditional banks. With our team, we do our best to survey all of your available options and get you the best deal possible based on the resources available to you.