Struggling to fund your first house flip? Discover the 3 most common ways to get funding, plus the BEST way to fund flips. It’s the strategy that our Apprentices use to get money, even for marginal deals! For many beginners, funding is the single most important lesson you could learn on the subject of flipping houses.
3 Ways to Fund Your House Flip
If you are struggling to fund your first house flip, you’re not alone. In fact, it’s the most common concern we hear. The good news is that there's plenty of money available for good deals. But, to get access to those funds, you need to know what I am about to share with you. So, just how do you find the money to do your first house flip? First, let’s look at the 3 most common ways to get funding.
#1: Hard Money Loans
The first way to fund your house flip is with hard money. Most house flips that take place across America are funded with Hard Money Loans. There are literally thousands of Hard Money Lenders with billions of dollars waiting to lend to house flippers. We developed a free Hard Money Locator tool that you can use to find lenders, but you can also use Google to search for them; they’re not “hard” to find.
Hard money loans were developed specifically for house flipping, whereby the loan is based on the deal, not necessarily the borrower. And Hard Money Lenders typically lend 80-90% of the purchase price, plus, they’ll typically provide the money for the renovation costs too. At Freedom Mentor, we’re a hard money lender for our Apprentices and we sometimes lend 100% of the purchase price, if the deal is especially good. For more details on hard money loans, check out our video: In Depth Look at Hard Money Loans.
Hard Money Requires a Good Deal
So, if there are thousands of hard money lenders, with billions waiting to lend, how come everyone isn’t flipping houses with hard money loans? Because it requires a good deal! Your purchase price needs to be well below the as-is market value, not only to satisfy the requirements of the hard money lender, but also because the interest rates can be 12% or more, so the overall funding costs are significant. Hard money is expensive money, so you need plenty of room in the deal to pay for it, and still turn a good profit.
As we’ve covered in other videos, finding a good deal can be hard – it’s one of the many reasons why people come to us to be mentored. Through our coaching, they learn how to find the best deals, even in a highly competitive marketplace. And most importantly, learn how to recognize that a deal is a good one!
Real World Hard Money Deal
One of our Apprentices, Scott Rogier, from the southeast, purchased a house flip by applying our proprietary motivated seller marketing techniques. He negotiated an 80k purchase price for a property that had an as-is value of 120k. This happened last month, so it’s still in process. As you know from our other trainings, Scott could have easily sold this property before having to close, but since it only needed cosmetic updates to then sell for around 150k, Scott wanted to close on it. He could have chosen any hard money lender, including Freedom Mentor Funding, but he chose a national hard money lender because they offered him an unbeatable interest rate, below 10%. He put 10% down, plus some closing costs, so he was about 12k out of pocket at closing.
The project is in the cosmetic renovation phase as we speak, but he’ll be in the money zone very shortly. Now I know what you’re thinking, where did Scott come up with the 12k for closing? Well, Scott’s been in our program and made some money doing other deals, so he had the cash. But what if you’re first starting, where does that down payment money come from for you?
#2: Personal Short-Term Loans
As described in our training: 4 Ways to Get Quick Cash for Good Deals, using personal short-term loans is a common approach to get funding for down payments, closing costs, and other expenses not commonly covered by hard money.
- 401K: Borrowing from your 401K can be a fantastic way to do this, because it’s your money, and if you’re going to pay interest to someone, it might as well be yourself.
- Line of Credit: Lines of Credit are also very helpful. These include a HELOC (if you own a home) as well as a personal Lines of Credit from a local bank. And although not for beginners, a Pro Tip on this subject are business lines of credit. After a year or two of successful house flipping, you can obtain a business line of credit from a local bank. In fact, most professional house flippers have established and grown their business lines of credit over the years, and basically fund much of their business with it, as opposed to using their own savings.
- Credit Cards: Credit cards can also be used for certain expenses, such as renovation materials on a Home Depot card. And you can typically pay for an inspection or an appraisal with a credit card as well.
The key to these funding sources is to apply them to good deals that are short term in length. Obviously, you can’t afford to do a bad deal with personal short-term loans. But also, if you take on a long, complicated rehab project, you may end up 12 to 24 months down the road and you’re still not finished. Then the interest eats up all the profits. You must get in and get out quickly to make these work.
#3: Private Money
The third common way that house flips are funded is with private money, typically from friends or family. They may have savings, or a line of credit, or even a retirement account, and they want to get a better return on their money, which you can offer, while being secured by real estate. Plus, if you’re going to pay interest to a hard money lender, why not pay it to a friend or family member instead?
Over the years, many of our Apprentices have turned their network into hard money lenders. It’s been a win-win arrangement because the interest has been much higher for their friends and family than they could get almost anywhere else. But to be clear, the deals themselves were still really good, and would have been approved by a hard money lender. It’s just instead of paying some hedge fund that 12% interest, they paid their uncle or their parents.
Private Money Needs a Good Deal
This may go without saying, but don’t EVER consider doing a bad or even marginal deal with a friend or family member’s money. Be VERY cautious! It’s one thing to lose a hedge fund’s money; it’s a whole different universe to lose Aunt Edna’s savings! Also, and this is extremely important too: Don’t "partner" with a friend or family member. You want them to be a private money lender, NOT a partner in your deal that’s telling you how to be an investor, especially when they themselves know nothing about real estate. Instead of giving them percentage equity in the deal, they need to be paid interest, as a lender.
So that’s how most house flips are funded. Hard money covers most of it, and then personal short-term loans handle the rest, or you turn your family or friends into hard money lenders. But what about the deals that aren’t so good? That aren’t like Scott’s deal that he bought for 80k and it’s worth 120k as-is? And what if you don’t have any access to personal short-term loans? Maybe you don’t have any friends or family willing to fund your deals, and the hard money lenders you’re dealing with won’t fund you without a big down payment. What do you do then?
The BEST Way to Fund Your House Flip
The best way to fund flips is to make the Seller your lender, or what is often referred to as creative financing.
Wholesaling
Now, as you’ve seen in previous videos, the best form of funding is no funding at all. And that’s why we so often flip the properties we get under contract before we ever close. Some call it wholesaling, or wholetailing, but it’s essentially selling the property to another buyer before you have to close on the property yourself. Therefore, it eliminates the need for funding. This is how our founder, Phil, did his first deal when he was living out of his truck and homeless. And it’s still one of our favorite ways to making money flipping houses because the risks are low, and it has potentially huge rewards. But selling prior to closing is just the beginning of creative financing.
Subject To/Seller Financing
We also do subject to, seller financing, or a combination of the two, to make the seller our bank in a deal. The genius of this is that it’s short term in nature. It can be difficult to convince a seller to let you take over the payments on their loan, or to pay them back monthly, over the course of many years. But when you keep it to less than 6 months, it’s much easier to get a seller to agree to financing the deal. Plus, the interest rates can be a fraction of the cost of hard money. And because of the lower funding costs, it allows you to do marginal deals sometimes, and still make a decent profit.
No Better Way to Fund Flips
We have literally been a part of thousands of creative financing transactions and there is just no better way to fund your house flip. For more details on Creative Financing, check out Phil’s most watched video: How to Buy Real Estate Without Cash or Credit. It is a phenomenal education and timeless wisdom.
Now the main drawback to using creative financing to fund flips is that there isn’t a way to borrow money from the seller to pay for renovations. So, it works best if either you have access to some personal short-term loans, or your own cash, or if the property itself doesn’t need a lot of work. Maybe the property needs a couple minor repairs, a little in cosmetics, and some quick make-ready. Otherwise, if it’s a major rehab, it’s best to sell prior to closing anyways.
Real World Creative Financing Deal
Here’s an example of a creative financing deal that created 75k in profits. Another one of our apprentices, Scott Bulger (this Scott is from the northeast) purchased a deal using our motivated seller marketing techniques. We negotiated a 290k purchase and agreed to get the seller 5k at closing and took over Subject To on a 271k mortgage. He agreed to get the seller an additional 14k within 24 months, which he paid in full within 2 months. Now, this one was Scott’s 10th deal with us, so he had developed his personal short-term loan options. That meant he was able to cover the 5k to the seller at closing, about $1500 in closing and holding costs, and he put in just under 12k to the quick rehab. The rehab included:
- Clean out
- Landscaping
- Deck and patio
- Some flooring
- Dehumidifier in the basement
- Minor plumbing and electrical items
He had all that completed within a matter of a few weeks, and after listing the property had multiple offers and locked in a buyer at 400k, with a 5k buyer credit. With less than 5k to the Seller, $1500 in closing/holding, 12k in rehab, 10k in commissions, 2k for closing costs and attorney’s fees, plus 4k in taxes and insurance and 14k paying back his seller, we netted just over 75k in profit! So, you can see how learning creative financing, along with personal short-term loans, can be an absolute game changer!
How Do You Do Creative Deals?
But that’s the other challenge for beginners: knowing how to do creative financing deals. From what to say to the seller, to the paperwork, and everything in between. And it’s yet another reason why people join our coaching program. So, whether you’re using hard money, personal short-term loans, private money, or creative financing, to fund your first house flip, you need to learn to find and negotiate good deals. Finding the money gets a lot easier once you do.
Every Successful House Flipper Has a Mentor
We’ve spent 2 decades mastering how to find, recognize, and fund good real estate deals, consistently, especially with creative financing. It’s allowed our apprentices to dominate their local markets, as they grow into full-time real estate investors, and totally transform their financial futures using these techniques. If you want the very best in your corner, helping you every step of the way, consider applying to our Apprentice Program where myself, Phil, Devin, and the rest of our team will guide and train you through this incredibly profitable endeavor of flipping houses. Text FREEDOM to 305-315-8030 or apply to our Apprentice Program here: Freedom Mentor Apprentice Program.
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