House flipping can be a great way to make money, but you need the right connections if you want to be successful. Having a good relationship with a real estate agent can be a major plus because you can find out about potential properties before other buyers get their hands on them.
Another essential is deciding what type of fix and flip financing you want to pursue. Flexible funding is vital for making money in this business.
Types of Financing That Work for House Flipping
There are several financing possibilities for fix and flip projects, but not all are a good fit for every business. You need to weigh the pros and cons of each option and see which ones adapt to your lifestyle, remodeling experience, project budget and goals.
Home Equity Loans or Lines of Credit (HELOC)
You can leverage the value of your primary residence to obtain funding for property purchases or remodeling. HELOC financing is popular for fixing up properties because it’s fast and adaptable. The interest rates are typically comfortable, as well.
The downside is that you need at least 20% equity in your home and you have to use your primary residence as collateral, which increases the risks if your project goes sideways. This option is great for experienced house flippers, but probably not the best for first-time businesses.
Angel investors and other private individuals can provide funding in exchange for some of the profits from the sale. The pros and cons of this option are extremely variable depending on your level of financial experience and the funding partner you choose. Sometimes, you can save a lot of money on interest, but you may have to sacrifice profits as well. Also, angel investors rarely back new house flippers.
Hard Money Loans (Bridge Loans)
These asset-backed loans are a type of alternative financing. They provide fast approval and low credit score requirements, which makes them popular for house flippers that have less-than-ideal personal or business credit. Another benefit is that they can cover remodeling easily, which is something traditional lenders typically won’t deal with.
The downside is that interest rates are higher. This means you need to use hard money loans only as short-term funding. They can be a great choice for projects when you know you can sell quickly after renovations, but not for long-term investment properties.
Business Credit Lines
Conventional business lines of credit combine many advantages for house flippers, providing strong and flexible funding with lower interest rates than many other options. The catch? You generally need at least two years in business to qualify, and a reasonably good credit score.