House flipping is an incredibly lucrative real estate investing strategy that can see you bag excellent profits if done right. Last year alone, for instance, investors across the country flipped over 49,000 single-family units and condos at an average gross profit of $60,000 per property.
But as with any real estate investing strategy, flipping homes is not all rosy. It’s riddled with a series of challenges, the most predominant one being the lack of funds. That is why in this article, we walk you through the various ways you can get a loan for flipping houses. We’ll also take a look at the popular 70% rule.
Can You Flip a House with a Conventional Loan?
Most new real estate investors turn to traditional lenders for financing when they first dip their toes into the world of home flipping. While there’s nothing wrong with that move, it can be cumbersome, costly, and frankly unfruitful.
So, can you flip a house with a conventional loan? Yes, but it’s complicated. The only way to get a traditional loan to fix and flip a property is if you have enough assets in cash to serve as collateral, or if you have enough equity on another property that the lender can leverage.
You may also get approved for a traditional loan for flipping if the house serves as your primary residence during the remodel. But even if you do get a mortgage to house-flip, it may not be a practical option for the following reasons.
Stringent Eligibility Requirements
Getting approved for a mortgage, even when you need it to purchase your own home, is usually a complicated process. It gets even more complex when you need to finance a house flip because traditional lenders perceive flipping as a riskier proposition.
Before they process your request, traditional loan lenders first evaluate your credit score and your debt-to-income ratio. If you have bad credit or a low debt-to-income ratio, your loan request is usually turned down with immediate effect.
A Slow Closing Process
Even with a great credit score, a conventional loan is still not a practical option for house flipping because it may take ages to close. Traditional lenders usually take a good deal of time to sort through your finances. An ordinary mortgage application may take up to 30 days before it’s approved.
This means it might take even longer for them to process your loan request. As a real estate investor, time is crucial. And every minute you wait increases the chances of another investor with ready cash buying off that property.
Traditional loan lenders will only offer up to 80% of the property value. What this means is that even if you qualify, you’ll need to cover the remaining 20% out of pocket. In other words, the amount you receive may cover the purchase costs but not the remodel costs.
Types of Loans for Flipping Houses
Conventional loans might be the go-to option for people looking to buy homes, but they just don’t meet the cut in real estate investing. On the bright side, there are plenty of alternative financing options you can use:
This is a loan from a high net worth individual within your network. It could be a random investor you met at a corporate networking event, a friend, or an immediate family member with high cash assets to spare.
Since the two of you negotiate the loan terms, using a private loan is an excellent way to finance a flip as you could always negotiate competitive interest rates and avoid costly loan processing fees.
But as with every other option, there’s a catch. In this case, that private individual has limited capital so could leave you at the closing table when it comes time to finance the transaction if they need to utilize their free cash someplace else. Plus its never a good idea to mix money with somebody you have a personal relationship with in case things turn south.
Hard Money Loans
These are short-term asset-based loans from private lenders or funds. They’re the most popular and the best way to finance a flip because of the following reasons:
- Bureaucratic red tapes: Hard money loans are an integral part of the real estate investing realm because they have few bureaucratic red tapes. Unlike conventional lenders, hard money lenders don’t solely look at a borrower’s credit score or debt-to-income ratio. Instead, they’re more interested in the asset in question and approve or reject loan requests based on the asset’s after repair value. This makes it easy for flippers without a perfect credit score to access the funds they need. Moreover, since they focus mostly on if it’s a good deal, a hard money lender canl approve your loan even if the house in question is in disrepair. In fact, many times the uglier the house, the better the upside potential value is.
- They close fast: Hard money loans are the best bet in real estate investing because they close fast. With fewer bureaucratic hoops to jump through, a hard money loan lender may process your loan within 5-10 days. This is incredibly convenient, especially if you’re trying to flip a hot property.
- Larger loan amounts: Some hard money lenders will offer the amount an investor needs to cover the costs of house purchase, as well as the repairs. This makes it easier for the investor to fix and flip the home, as well as pay back the loan.
In a nutshell, hard money loans are an excellent option for any investor looking to facilitate a fix and flip transaction. However, due to the high risks involved, hard money loans attract high-interest rates.
In crowdfunding platforms, investors pool their money together to fund real estate investments. It’s a great way to get a loan for flipping houses because it has fast closing, friendly investment terms, and one can access large loan amounts. However, crowdfunding is quite expensive. Most loans have an interest rate of between 10 and 16%. Also, you don’t get the entire amount upfront.
Other Ways to Get Loans for Flipping Houses
- Home equity lines of credit
- Investment property lines of credit
- Cash out refinance loans
- Personal loans
What is the 70% Rule in House Flipping?
If you’re going to venture in house flipping, you need to learn some of the tricks investors use to maximize their return on investments. While you’ll learn the ropes of the trade as time goes by, one of the tricks you need to know before you start is the 70% rule.
Also known as the 70% rule, the 70% rule is the guideline investors use to gauge how much an investor should pay for a distressed property. The rule, developed by seasoned industry veterans, states that a home flipping investor should avoid paying more than 70% of a property’s after repair value.
Although it’s not cast in stone, it’s advisable to play by it because even though house flipping is a lucrative investment strategy, it’s also quite an expensive undertaking. If you’re not careful with your figures, rehab costs can quickly eat their way into your profits, leaving you with an unhealthy return on investment and a loan to repay.
The formula for the 70% rule is as follows:
After repair value(ARV)x .70- estimated repair costs= Price to pay for distressed property.
It’s okay to adjust the 70% rule if:
- The purchase price is way too low or too high
- The property in question calls for fewer or has predictable repairs.
- The real estate market in question
- The flexibility of your exit strategy
Kick-Start Your Fix and Flip Real Estate Investment Today
Flipping houses isn’t as glamorous as TV shows depict. However, once you master the art of flipping, it can be a lucrative way to earn an income. One of the barriers to entry is usually lack of funds, but as discussed above, you’ve got plenty of loan options you can capitalize on. Hard money loans, for instance, are an incredibly flexible way to stay on top of your flipping projects.
Get in touch with our highly responsive team today, to apply for one, and kick start your journey to expert house flipping today.