House flipping has gradually become more popular over the years, and rising home prices only make flipping more attractive to investors. However, flipping a house isn’t always going to be profitable, and it can even cost the investor money by the time the home sells.“I did my first flip eight years ago and broke even,” says Holly McKhann, owner and founder of House Flip Masters in Capistrano Beach, Calif. “We have now flipped over 200 houses and coach others about investing and how to do successful flips.”
She and her husband had operated the company together until recently when she took over the business while he pursued another career.
“It’s a live and learn career. Our first time out, we made the house too nice with high-level granite and too high quality of cabinets,” she adds. “But it is fulfilling and satisfying, and you give a lot of jobs for subcontractors.”
With a good strategy and some help, house flipping can be very profitable. But sometimes the hardest part is getting the money necessary to improve the house and to be able to continue on with more houses.
McKhann and her husband began their business with a lot of cash from profits he had made with a land development. But having a large savings of money isn’t the only way to get into house flipping.
One popular option for financing flips is through loans – and there are several options for home buyers.
Home Equity Line of Credit
If you already have a home with sufficient equity, you might want to look into using that to buy an additional property to flip. By using a home equity line of credit (HELOC), you can take money out of your home to finance a flipper.
Every lender will have different rules on how much they will lend and rates tend to be a little bit higher than those found on normal mortgages.
Remember though that by using your home as the collateral that it becomes at risk of losing if something should go wrong.
Investment property loans through banks, etc.
McKhann, who is a CPA and has an MBA in finance, says for a first-timer, the best way is to just go borrow money for in investment property. This can be done through your current bank or through a number of other lenders.
“You will have to put 20 percent down or sometimes 25 percent. But it will be the cheapest money you can borrower at 4 percent,” she says.
You need a higher credit score and some money on hand to buy investment property this way, but it can be a simpler option for an inexperienced flipper.
A private lender can be any non-bank company or person loaning money. For some, this can be your mom or dad, your wealthy relative or a co-worker that recently fell into a lot of money.
The money is usually secured by a note and deed of trust, for the purpose of funding a real estate transaction. These types of transactions can move much quicker than a normal mortgage would through a bank, and it could cut out the need for appraisals and other small steps that increase the cost of a normal home loan.
You can also find better interest rates and terms through private lenders. But keep in mind that bringing your friends or family into investments doesn’t always end well.
This can be the most expensive way to buy investment property with 10-12 percent interest rates with 2-5 points right now, McKhann says. But sometimes, it’s a necessary way to get the money needed quickly. The money is usually short-term at 12 months or so, and loans are made for less than 80 percent of the property value. Also, there is a minimum loan size you’ll need to follow.
Some companies are popping up that offer interest rates for hard money to property investors that are somewhere between conventional loans and more expensive hard money lenders. Check out all your options, McKhann says.
“Make sure you find a mentor, someone that’s done flipping successfully,” she says. “Don’t take them to lunch, but show them how you can help them in their own business. They are too busy to just have lunch with you.”
Understand the process
Before you commit to any type of loan or mortgage, keep in mind that flipping is not for the faint of heart as you’ll never know what you find in your flipper home.
The process can also be long and difficult. Without proper research, you could end up purchasing a home in a location that isn’t popular.