Loans for House Flipping: Options for Real Estate Investors

In recent years, house flipping has increased in popularity. This is no surprise, as it allows real estate investors to quickly turn a profit. However, it’s not as easy as it sounds. Before you go ahead and pursue house flipping, there are many things to consider, including the ideal form of financing. Here’s what you need to know about house flipping loans and how to succeed in this exciting yet competitive business venture.

Evaluate Flipping Costs and the Market

First and foremost, consider all of the costs that you’ll face as a house flipper, including:

• Finance Costs: Unless you have the cash to cover the entire cost of a house, you’ll likely need to finance it. Most lenders will charge you interest and fees in order to do so.
• Closing Costs: Closing costs usually include appraisal fees, title search fees, and attorney fees. In most cases, they’re between 5% to 8% of the sale price.
• Property Taxes: While taxes vary based on where you live, anywhere from 0.28% to 2.49% of your home’s value is common. Note that property taxes are not set in stone and may go up over time.
• Insurance: Home insurance can protect your flip from damage. It might also be required if you take out a mortgage.
• Renovation Costs: On average, you could pay anywhere between $15 and $60 per square foot for renovations according to Norman Builders. Of course, your costs will increase based on property size, building materials, and labor costs.

It’s also important to consider the market the house is in. Do some research to determine what will happen if you buy and renovate the house quickly. Will it sell shortly after, or will it sit for a while? The longer the house stays on the market, the more you’re on the hook for paying the monthly bills. If the home is in a high-value area, consider if you’ll need a jumbo mortgage and the requirements needed to get approved, along with the costs to renovate in the area.

How Much Funding Do You Need?

The loan you choose will have its own credit score and debt-to-income requirements. Your lender may also rely on these calculations to help determine how much funding you need and can get approved for.

Loan-to-value ratio

The loan-to-value (LTV) ratio shows your property’s value in relation to the total loan you need to acquire and rehab it. Most lenders look for LTV ratios under 80%.

Use this formula to calculate your LTV ratio: Loan amount/Property value.

Loan-to-cost ratio

Loan-to-cost (LTC) ratio compares the loan value to your project cost, which can include purchase price, renovation, construction, and other related expenses you’ll face to complete your repairs or improvements.

Use this formula to calculate your LTC ratio: Loan amount/Total project cost.

After-repair value

After-repair value or ARV refers to the estimated value of a flip after you complete a renovation. It can determine if a potential house flip is worthwhile.

Use this formula to calculate your ATV: Property’s current value + the value of renovations.

Types of Loans for House Flipping

Fortunately, there are a number of financing options available for house flipping, such as:

Home equity loans

Home equity loans allow you to borrow against the equity you’ve built in your primary property. Upon approval, you’ll receive a lump sum of money you can put towards your flip. You can land a low fixed rate, but you will have to pay closing costs and may lose your home if you default on your loan.

Home equity lines of credit (HELOCs)

Home equity lines of credit (HELOC) are similar to home equity loans in that they tap into the equity you have in your primary property. The difference, however, is you’ll receive a revolving line of credit and can withdraw funds as much or as little as you’d like, up to a set credit limit, like how a credit card works. While you may lock in a low interest rate, the lender may put your primary home into foreclosure if you fail to make your repayments. You’ll also be on the hook for closing costs.

Cash-out refinance loans

With a cash-out refinance, you also use the equity in your primary home. You’ll replace your mortgage with a new, larger loan and pocket the difference as cash that can be used for your house flip. While you may secure low refinance rates, you’ll pay closing costs and face the risk of foreclosure if you can’t repay your loan as you agreed to.

Personal loans

Personal loans can be used to cover virtually any expense, including house flip investments. Offered by banks, credit unions, and online lenders, they usually come with a quick application process and fast funding. The downside, however, is you’ll likely need good to excellent credit to get approved and qualify for the lowest rates. In addition, the lender may charge you origination fees and other fees other than interest.

Hard money loans

Offered by private lenders and credit unions, hard money loans can allow you to forgo the traditional mortgage process and get the money you need quickly, even if you don’t have the best credit. However, you will have to settle for an interest rate as high as 15% in exchange for convenience. You might also need a higher down payment.

Crowdfunding

If you opt for crowdfunding, you’ll likely set up a campaign on a crowdfunding platform to find investors who will support your house-flipping venture. You won’t have to fund it yourself, but it can be difficult to connect to investors at first. In addition, you might also owe them a share of your profits.

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