House Flipping Loans: 6 Best Ways to Fund a Flip

If you’re new to real estate investing, you probably have a lot of questions. I’ve certainly watched my share of “reality” television featuring house-flippers dealing with situations that are resolved within the hour. But flipping houses is not for someone without a clear plan, and getting a loan for your house flip may be a key step.

I know I would have questions. How do you find a property to flip? Do you live in a bad state for flipping houses? Should you hire contractors to fix up the house or take the DIY route? (Those of us who have barely ever picked up a hammer have an easy answer to that last question.)

But perhaps the biggest question: how will you fund your house flip?

Let’s talk about how to get a loan for flipping a house. But first, to give you an idea of what you need to plan for financially, we’re going to touch on the general costs of flipping houses.

The costs of flipping a house

The costs of a flip can vary, as there are several components that make up the total amount you will pay on a project. Buying a house can be pricey enough, but adding all the other aspects to renovate and sell means you really need to do your homework. Your costs can include:

• Purchase price and closing costs (property acquisition)
• Cost for home renovations (material and labor costs)
• Carrying costs (interest on financing and financing fees)
• Marketing and sales costs

Although you can cut costs in some areas (for example, if you’re handy and can do some of the work yourself), you should have a thorough vision for what the total cost of your flip is going to be before you start looking for funding. The goal for successful flippers is to turn a profit on each project, so being strategic is critical.

With all the costs in mind, it’s time to secure financing for your real estate project. Likely, traditional banks will be hesitant to loan you money for a house that won’t be your primary residence. Even banks that loan money for flipping likely prefer someone with a track record of successfully flipping houses versus a first-time flipper.

So where do real estate investors turn to cover their costs? Here are six financing options for house flippers to get the funding they need, including the pros and cons of each.

Family or friend loans

Turning to your family or friends to lend you the money for your real estate investment is an option worth considering. You may be able to avoid some of the costs of borrowing from traditional mortgage lenders if you find an acquaintance who’s interested in becoming an investor.

That said, there are some major caveats to keep in mind when using loved ones as private lenders. First of all, money and relationships don’t tend to mesh well. Borrowing money tends to…well, make things awkward.

You (and your family member or friend) must consider the potential negative consequences of them bankrolling your house flip:

• You lose money on the investment and can’t repay your friend
• Your lending friend/family member needs the money sooner than expected
• The person lending you the money uses it as leverage to control you
• The person lending you the money changes the terms
• You need more money than anticipated
• You lose that relationship entirely

If you really feel that borrowing from family or friends is right for you, it’s best to treat it just like a bank loan. Get the terms of the agreement in writing and follow them.

Even if the person offering the loan doesn’t want you to pay interest, pay an interest rate that’s comparable to the rate they could earn with a high-yield savings account. This way, they can’t see it as a gift, which could have unfortunate consequences.

I would honestly proceed with great caution if considering a friend/family loan, simply because you don’t want a bad flip to end up costing you relationships.

Seller financing

Seller financing is when the buyer has a loan agreement directly with the seller of the property, instead of going through a financial institution. As you might imagine, this can be useful if you’re having trouble getting a loan due to bad credit or because you have less cash available for a down payment.

Sellers may also have less rigorous requirements when it comes to flip financing. Because a bank isn’t participating in the transaction, you will generally encounter fewer closing costs as well. You can avoid the cost of mortgage points (fees paid to the lender during closing to reduce the interest rate), origination fees, and other charges often associated with lender financing.

In this scenario, the seller takes on the role of financier, extending you enough credit to purchase the home. In most cases, you will sign a promissory note to the seller detailing the interest rate, repayment schedule, and what happens if you default on your loan. Then, you pay back the loan over time as you would with a traditional lender.

Typically, the idea is that in a few years, when the home has gained enough in value or your financial situation has improved, you can refinance your mortgage with a traditional lender. Because you may be paying higher interest than you would with a traditional mortgage, refinancing is often a good idea.

Home equity loan or line of credit

If you’ve built enough equity in your home, you may want to consider tapping into it to fund your house flip. Equity is the difference between what your home could sell for and what you owe on the mortgage. Here’s more about the main ways of accessing your equity for a flip project.

Home equity loan

A home equity loan is a type of loan that is backed by your home. In other words, you use your home as collateral. Should you default on your loan, the lender could foreclose on your house.

For the most part, interest rates and payments are fixed with a home equity loan, so your monthly payments won’t fluctuate. You can usually borrow up to 85% of your home’s value; however, the exact amount of money you can borrow will depend on factors such as your income, credit history, and how much your home is worth.

For example, say you have a home with a market value of $350,000 and you have a remaining balance of $200,000 owed on your first mortgage. If your lender lets you borrow up to 85% of your home’s value, here’s the math on your potential loan:

• $350,000 x 85% = $297,500 (the total maximum of what you can borrow)
• $297,500 - $200,000 (the amount you owe on your mortgage) = $97,500

Using this example, that’s $97,500 you could put toward funding your flip.

Home equity line of credit

A home equity line of credit, also known as a HELOC, is a revolving line of credit that is also secured by your home. It resembles a second mortgage but functions much like a credit card in that you have a credit limit you can tap into whenever you need it.

You can use a HELOC for anything you want, including flipping houses. What I like about a HELOC is that you only use the credit you need, and only make payments on the amount you borrow.

Similar to a home equity loan, you may be able to borrow up to 85% of your home’s value. However, unlike a home equity loan, HELOCs usually have variable interest rates similar to a credit card. As a result, your interest rate can change month to month depending on U.S. economic trends. This can lead to lower payments one month and higher payments the next.

Closing costs and fees vary by lender for both HELOCS and home equity loans. These can include, but are not limited to appraisal fees, origination fees, notary fees, and title search fees. Some lenders might not charge closing costs and fees at all, so comparison shopping is always a good idea.

Another alternative to consider:

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401(k) loans

Tapping into your retirement funds to finance a flip is another option, though it has upsides and downsides. In some ways, you might think a 401(k) loan is the “easy” button for your house flip, if your plan permits it. However, there are serious reasons to be wary of this type of financing.

For a traditional 401(k), the repayment process is hands off. You repay your loan through payroll deductions as long as you are employed, which helps reduce the possibility of falling behind on your payments. If you’re self-employed, you just need to set up a payment schedule for your solo 401(k).

Your 401(k) loan agreement will spell out the principal, loan term, interest rate, and any fees that apply. The IRS limits the amount of money you can borrow from your 401(k) or solo 401(k). The maximum amount will be the lesser of $50,000 or 50% of the amount you have vested in the plan. Depending on the cost of your flip, the maximum amount you can borrow ($50,000) may be enough to cover the renovations of your flip, but not the purchase price.

Your vested amount is the amount you own in a retirement plan, and you also always own 100% of your contributions. Company matching funds usually vest over time. So if you’re 100% vested in your account balance, you own 100% of the funds — both what you contributed and what your employer contributed.

The normal loan length for a 401(k) loan is five years, per IRS regulations. You may be able to arrange for a shorter repayment term with your 401(k) plan administrator.

I don’t love the idea of a 401(k) loan to fund a house flip because it’s such a huge risk to your retirement. In a perfect world, you should always aim to boost your 401(k) until retirement age, not withdraw funds early.

By taking out funds early, you decrease your 401(k) balance and lose out on future gains that money would have made. It’s an option, but it’s never ideal to rob from your retirement if you can avoid it.

Personal loans

When you take out an unsecured personal loan — an unsecured loan is issued solely based on your creditworthiness, without putting up collateral — you can typically use the funds for just about any purpose. This includes financing flipping a house.

Your credit score and income impact whether you’ll be approved for a loan. The lender will use this information to assess your ability to repay the loan and this will affect the terms of the loan, such as the loan interest rate, how much you can borrow, and for how long. If you have strong credit and adequate income, you shouldn’t have much trouble getting favorable loan terms.

The amount of money you can borrow will vary from lender to lender but can range from $1,000 up to about $100,000. Keep this in mind when searching for the best personal loan so you can get the amount you’ll need for your real estate project.

If you can’t secure enough funding with one personal loan, you may consider taking out several loans to fund your flip. Consider that the average interest rate on a 24-month personal loan was 11.92% as of May 2024, according to Federal Reserve data. Your actual rate depends upon credit score, loan amount, credit usage, and other factors.

Before deciding to get a personal loan, I’d get quotes from multiple online lenders to get an idea of the amount of financing you may qualify for as well as rates. In many situations, you can be approved in a matter of minutes, with your funds deposited into your account within just a few business days — sometimes within 24 hours.

Hard money loans

If you can’t qualify for traditional financing to fund your real estate investment, a hard money loan might be a solution. These types of loans are primarily used in real estate transactions, in which the underlying property or another existing property is often used as collateral. Lenders are typically individuals or companies advertising themselves as hard money lenders, but not traditional banks.

Hard money lenders typically have an understanding of local real estate markets and don’t require you to jump through as many hoops as traditional lenders in order to secure funding, making them a quick solution for financing. But although you might find a hard money loan easier to procure, they often come with higher interest rates and fees.

Hard money lenders primarily consider the property you’re flipping or another underlying asset — more than they do your income or creditworthiness. For a house flip in which the flip property is used as collateral, hard money lenders will inspect the property and make a decision after determining whether the property is worth owning.

Should you default on the loan, the hard money lender will take ownership of the property. The inspection process usually includes an appraisal, survey, and home inspection to rule out hazardous conditions. Other considerations may include the neighborhood and your plan for the property.

Alternatively, if you have significant equity in an existing property, a hard money lender may provide a cash-out refinance loan. A cash-out refinance loan pays off your existing mortgage, resulting in a new mortgage. Although this offers access to funding, using your primary residence as collateral is inherently risky.

In general, the easier a solution seems, the more risky it may be. That’s not to say a hard money loan isn’t the right option for you, but you should consider the higher costs as well as the risk of using the property or another asset as collateral.

Bottom line

If you’re hoping to finance a real estate flip, good for you! But be sure to familiarize yourself with the various loan options to make a wise choice.

Obviously, consider the options available to you, since not everyone has home equity or a 401(k) to tap into. In general, you want to find the least expensive financing option that poses the least amount of risk to your home or other aspects of your financial future.

Please remember that you could lose money on a flip. All investments carry some risk, but you can research carefully to minimize the downsides. If you cover all your bases, you’ll have a much better chance of your flip project being a success.

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