Have you ever seen a crumbling house and been excited about its potential? If yes, then the thought of flipping the house must have crossed your mind. Buying a sad-looking house, giving it a makeover, and selling for a profit is a popular venture.
The return on investment (ROI) for house flipping has increased significantly in the past few years, which makes fixing and flipping houses an incredible opportunity. However, while making a handsome profit sounds like a great idea, many find it difficult to fund the project in the first place. In this article, you can find answers to common questions for house flippers: "How can I afford this?" and "Where do I start?". Here are four funding options to consider:
One of the best ways to flip a house is by taking a personal loan. Investors can use a collateral-free personal loan for home renovation
and increase the value of the purchased property with the right repairs and upgrades. Once the work is completed, they can sell the home at a much higher price and maximize their ROI.
There are numerous online lenders who are willing to offer a personal loan or a line of credit to fix and flip the house you are interested in. Check which online lenders are giving a personal line of credit with good interest rates. They allow you to withdraw any amount from the line of credit at any point without many restrictions, and a few online lenders just charge interest on the amount withdrawn rather than on the entire amount allocated to you. The repayment can be done in flexible EMIs by choosing a payment period that works for you — which could be anywhere between 2 months to 36 months. Such credit cards let you enjoy 100 percent cash withdrawal in addition to special rewards.
Hard money loans
Hard money lenders are private lenders who have their own money resources or pool of other people’s cash. They lend this money to people like real estate entrepreneurs and earn money on the interest.
These lenders make loans for flippers and real estate developers on slightly different terms than banks. The loans are designed for individuals who don’t have great credit but need money to renovate or flip houses. These are short-term loans that typically need to be paid within a year. There will be high-interest rates with strict penalties. That said, getting approval for this kind of loan is much easier than obtaining a more traditional loan.
They normally require some form of down payment. It is possible to negotiate a little so that you don’t feel the pressure to sell your flipped house quickly to avoid a big balloon payment due to the shorter payoff period.
Traditional bank loan
This is generally the first option that everyone would consider — getting a loan from your local bank. You can apply for a fix and flip loan from a bank, which is similar to getting any kind of mortgage loan. You can decide how long you want the loan term to be and put up the appropriate down payment, following which the bank will give you the cash.
The procedure sounds simple but the process can take a long time — from application to approval. You will need a good credit to even qualify for the loan. Moreover, if you don’t have a good track record of flipping houses successfully, the bank may be hesitant to loan you money.
Real estate crowdfunding sites
This option has been gaining traction in the past few years. People are increasingly using real estate crowdfunding sites to finance various real estate projects, most of which include house flipping.
Several people invest varying amounts of money in a real estate project they are interested in. The small amounts contributed by everybody amounts to the funding of the project. Most crowdfunding investing for flipping houses are built as debts or equity, based on the site being used for the project.
In debt crowdfunding, the investors buy into a loan or a portion of that loan. The term duration and interest rates can vary but generally fall between 1 and 36 months and 8 to 14 percent respectively. Remember that an origination fee is charged by the crowdfunding site, and the investors earn money monthly through interest charged on the loan. If there is a balloon payment, it needs to be paid at the end of the term which covers the principal and interest left over.
Whether you take a personal loan, choose an online lender offering a personal line of credit, or other options to fund your project, you can take see impressive profits from fixing and flipping a house.
Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India's first app-based credit-line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life's mission to help and educate people on various financial topics, so email him your questions at [email protected]neytap.com.