Where can I get a Loan to Flip Houses?
Saving up your money until you can afford to purchase an investment property to flip is no small feat. Taking out a loan can solve this issue, as long as you choose a lender that meets your needs as a house flipper. There are several options for real estate investment loans, from hard money lenders to traditional banks, each with its own set of pros and cons. The key is to find a lender that makes the most sense for your unique situation and goals.
Hard Money Lenders
Of course hard money lenders topped our list, after all, that’s what we do! Hard money loans are a great option for investors who need to close on a property quickly, and want to work with a legitimate financial institution. Check out our full-length blog on the pros and cons of hard money lending.
| Pros | Cons |
|---|---|
| Fast closings | Higher interest rates than most banks |
| Flexible loan structuring | Require credit check and borrower history to structure loans |
| Experience and operational knowledge in the house flipping industry | |
| Proven ability to vet deals and correctly manage construction funds |
Private Lenders
This is a very broad category, including everything from a friend or family member looking to invest their money to venture capital groups. Private Lenders typically provide funding for a house flip with a very simple set of terms and regulations.
| Pros | Cons | |
|---|---|---|
| Low interest rates | Variable amount of industry knowledge | |
| Fewer regulations and less paperwork | Variable experience managing construction funds | |
| Experience and operational knowledge in the house flipping industry | ||
| Variable amounts of capital available | ||
| Potential to damage relationship (if funds are coming from friends or family) |
Traditional Banks
Qualifying for a traditional bank loan for a fix and flip project is difficult and unlikely for flippers who are just starting out. Traditional banks don’t like lending on a risky asset (such as a distressed property), so you may be hard-pressed to find one that is willing to take the gamble.
| Pros | Cons | |
|---|---|---|
| Some of the lowest interest rates available | Slow to close due to red tape and heavy regulations | |
| Require high credit scores for approval | ||
| Lack experience and operational knowledge in the house flipping industry | ||
| Unlikely to loan on a highly distressed properties |
One of the most popular questions about house flipping is, “can I flip houses without any cash?” The idea here is to avoid a down payment by finding a lender willing to offer 100% financing. If 100% financing sounds a little too good to be true, it’s because it usually is. No legitimate lender is willing to assume 100% of the risk of the investment without some kind of catch. Often, their catch is foreclosure. This practice is known as “loan to own” lending, where an unethical lender lures a house flipper in with promises of 100% financing with the intent of foreclosing on the property when the flipper runs out of cash during construction. We hate hearing these stories, but these “loan to own” lenders are out there and many flippers fall prey to their promise of lending without a down payment. Down payments are required by most legitimate lenders and serve as a commitment to the project on the flipper’s end. Just like any other business partnership, both parties have to bring something to the table in order to establish trust and prove that there is a significant commitment to the success of the project. So, what do you do if you don’t have enough cash to put up a down payment?
Getting Creative With Your Down Payment
Finding a Partner aka a “Joint Venture”
Finding a partner to bring the necessary funds to the project allows flippers to secure their next deal even if they’re short on cash. These partnerships are typically arranged with an agreed upon split in profits once the flip is complete and the property is sold. Some of the best places to find these partners are local Meetups and real estate investing events. Many real estate investors attend these gatherings because they want to keep their money invested and working for them, but do not have the bandwidth themselves to manage a house flip. You should also utilize hard money lenders to find a partner since they know many of the players in the industry and may already have contacts looking to partner up.
Borrow from IRA or 401k
Another way to fund the down payment on your fix and flip loan is to borrow from your self-directed IRA or 401k. While it’s always best to check the specific restrictions on your retirement savings account, many allow you to borrow from the account and use the funds for a real estate investment. This can be a great option for flippers who need some extra cash to meet the down payment amount, but don’t want to split the profits from the sale of your flip with a partner.
Cross-Collateralization
A unique way to secure a loan when you’re short on cash is to utilize cross-collateralization of additional properties. While this is typically seen as a last resort or for large-scale projects, some lenders will consider cross-collateralization on a case-by-case basis. The premise of cross-collateralization is to leverage equity that you hold in another property as a means of “skin in the game.” This strategy mitigates the risk of the lender, similar to the purpose of a down payment, and allows flippers to secure financing without the cash needed for a down payment.
Financing your first house flip can be an intimidating thought, but there are plenty of options out there to pick from. We would love a chance to earn your business by talking to you about your investing goals and underwriting your next house flip, free of charge.