How to Flip a House Using Other People’s Money
One of the most lucrative ways to get started in real estate investment is house flipping. Using other people’s money referred to as “OPM” is one of the ways to get started on this venture if you are long on skills and short on funds.
Below we will share tips on how to find funding through private parties and public lending options. But first, let’s review some of the typical expenses for a house flipping project that you need to consider when raising capital.
House Flipping Expenses to Budget For
#1 – Renovation and Repairs
Renovation entails paying for labor, equipment, and materials. There is also the cost of maintenance, demolitions, and waste removal. It is advisable to have a 20% to 30% cash reserve fund on hand relative to the purchase price of the property.
#2 – Utilities
As a real estate investor, you will need to pay for gas, electricity, and water. Other utility expenses are trash and sewage costs. Check with your local utility providers for any recommendations to enable you to cut back on energy usage and power expenses.
#3 – Insurance
Factor in the cost of paying for homeowners insurance. Home-owners insurance will protect you against losses or damage to your property including real estate rehabs. This insurance helps safeguard your property against natural disasters, accidents, damage, and other unforeseen occurrences.
#4 – Other Expenses
Other expenses incurred in house flipping are redoing wallpaper, paint, bathroom, installing a new carpet and cabinets. Other additional fees include capital gains taxes and property taxes.
Ways to Use Other People’s Money to Fund House Flips
Some of the available options for funding a house flipping deal using other people’s money are:
#1 – Partnerships with people such as relatives, close friends, or business associates
This is where you approach people such as close friends, relatives, or business associates and share your investment goals and ask if they would be willing to help you get started.
Before looking for partners, you need to do proper research on house flipping and the locations you are looking to invest in.
You need to prepare an investment plan which you may present verbally or in writing. Know the potential resale value and the income that will be generated from the investment.
Once you have someone interested in funding your house flipping project, negotiate the terms and have it in writing.
Set a repayment schedule on how you intend to repay the loan. Will they charge any interest on the loan? Will there be a monthly installment or a lumpsum payment once the property is sold?
You need to have all these things agreed on and written down. You also need to consider how you will keep your partner updated.
You can do this through an e-mail newsletter or during conversations. Be prudent, transparent, and keep the partners informed with any updates to avoid any potential cause for stain in the relationship.
#2 – Private Lenders
These are individuals with disposable cash at hand to loan you. They could have money in mutual funds, IRAs, banks, or an abundance of equity in their home. Private lenders are ready to negotiate terms, and can accept a share of profit in exchange for not charging interest.
These individuals offer better terms and can give up to 80% of the cost of the property, and charge an 8% to 12% interest rate plus zero to two points.
The amount of money the lender will give you will be based on your experience, comfort level between you and the investor, and the real estate deal.
Private lenders can give the funds requested within a few days or even hours. This means the investor can secure funding in as little time as possible.
As a guarantee for the loan, most private lenders will require a mortgage or a deed on the subject property, a promissory note, or a private asset but the terms are negotiable.
The best way to convince a private lender to partner with you is to offer them a return that will make their investment worthwhile, while at the same time maintaining a decent profit margin for yourself.
You can get recommendations of private lenders from real estate agents, inspectors, appraisers, real estate attorneys, or from your existing business connections.
#3 – Crowdfunding
Crowdfunding is a financing method that relies on multiple investors who each give a portion of your loan. This method of financing is an online marketplace for real estate investors that allows for the opening of a free account and acquiring investment in properties across the country.
Crowdfunding provides more efficient, faster, capital that meets the needs of investors looking for fast execution and flexibility in terms and underwriting standards. The return to the investors is between 9% and 11% interest rate.
Crowdfunding sites allow you to solicit funding from various investors. Each lender earns interest on the money they give. Some sites will pre-fund your loan meaning they will close your loan as they wait for investors to provide funding. Others do not close it until it is fully funded.
This type of financing focuses on collateral and the quality of the deal. Crowdfunding websites do not offer the opportunity to negotiate. They have already set parameters for every deal because they are in charge of several investors. The loan and the investors are paid off once the property is sold.
#4 – Hard Money Lenders
Hard money lenders are loan issuers that need you to secure funds borrowed with equity or property as collateral.
These lenders target people who are not qualified to get loans at normal rates and charge high-interest rates of between 10% to 15% plus two to five points. A point is equivalent to 1% of the loan amount. The points are paid once the home sells.
Hard money lenders use after-repair value as a base for the amount you can borrow. The lender will hold the first position lien on the home until the borrower returns the borrowed funds. The loan term is usually less than a year.
The cost of hard money lenders may be constrictive for a starting house flipper. A hard money loan is the best choice for experienced investors and investors who have one or multiple existing properties
#5 – Seller Financing
Seller financing is where a property owner operates as the lender on real estate. Instead of taking a loan or a mortgage from a bank, you request the seller to fund the fix and flip deal.
If you get a property that requires repairs and an owner ready to fund, you can formulate the deal by offering the seller monthly principal and interest payment until you are done with the flipping. You can also give a percentage of the profit when you sell instead of making monthly payments.
The other option is to give both regular monthly income and a final lump sum payment that clears the loan and gives additional profit.
Many agents and investors are not familiar with seller financing. You need to seek advice from professionals such as real estate attorneys to help you negotiate such an arrangement.
#6 – Home Equity Loan
A home equity loan allows you to take a loan or home equity line of credit (HELOC) for the down payment and acquire a loan for purchase and rehab costs if you have considerable home equity. You need to have at least 20% equity in your primary residence.
Equity is the difference between the market value of your residence and your mortgage balance. Home equity loan gives you access to funding, and you can get the money as needed. You should have good credit, have a debt to income (DTI) ratio of below 30%, and enough monthly income to afford your mortgage payments and pay off the loan.
You can talk to a mortgage banker for further details concerning a home equity loan (HEL) or home equity line of credit (HELOC).
Overall, there are several ways of using other people’s money to flip a house. Do proper research so that you can accurately keep a record of any expenses or fees you might incur as you work on your fix and flip project.
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