Financing house flipping projects entirely out of your own pocket is almost never a good idea. While it’s very possible to make excellent profits with fix and flip investing, there’s also a fair amount of risk involved, so you don’t want to be in a position where you’re putting your entire life’s savings on the line. Instead, it makes sense to turn to other financing options. These are the four most common:
Hard Money Loans
Hard money loans are usually provided by lending companies to novice investors. They are not well regulated and tend to have the least favorable terms for investors. A hard money loan might be the easiest kind of loan to obtain, but it will come with the most strings attached. You’re also unlikely to get much support or guidance from a hard money lender — they may or may not care whether your house flipping projects exceeds.
Private Money Loans
Private money loans can be offered by individuals or by licensed lending firms. (ZINC Financial is a licensed private money lender.) The house flipping loans offered by private money lenders are usually available to everyone from novice house flippers to highly experienced investment professionals. In general, the rate you’ll be able to obtain depends upon your level of experience. With a private money loan, you should expect to front at least a portion of the home purchase price yourself. This is a good faith measure that is required by most private money lenders to show that both you and the lender have something at stake.
Private money lenders can offer fix and flip loans ranging from about $25,000 to over $1 million, depending upon the size and success of the firm. One major advantage of working with a private money lender is that you can expect to have your loan in hand within a matter of days, rather than weeks or months.
Usually only highly experienced investors utilize bank loans for house flipping purposes. Bank loans generally come at a better rate than private money loans or hard money loans, but they also take much longer to obtain. You’re also very unlikely to secure a bank loans for the full amount that you need for a house flip.
Another good option that can be utilized by experienced house flippers is joint ventures. A joint venture can be entered into with one or more partners who will front some or all of the investment costs in exchange for an equitable split of the ultimate profits. If you’re considering a joint venture with a friend, make sure to be clear about the terms of the deal up front. Handshake agreements are never a good idea when talking about hundreds of thousands of dollars.