Flipping houses has become a lucrative business in the real estate industry. There are many reasons why people decide to purchase homes to fix and flip, but the most common one is to make a profit. To do this, it’s essential to evaluate your financial situation and weigh the advantages and disadvantages of each financing option before deciding which one is best for you.
If you believe that this is the right path for you, here are six of the most common financing options for fixing and flipping houses that you can consider.
1) Fix and Flip Loans
These types of loans are designed for people who want to purchase homes that they plan on fixing up then selling for a profit.
Advantages: These loans have competitive rates that fit most budgets, including those with smaller down payments. In addition, you can use the equity built in your current home to help cover closing costs and other expenses associated with purchasing a new home.
Disadvantages: Most lenders require that homes being purchased have a minimum of 20% equity. This can be difficult for homes that need extensive repair, making it financially risky to take out this type of loan.
2) Home Equity Loans/Lines of Credit
As long as you have equity in your home, this type of financing allows many people to purchase homes to fix and flip.
Advantages: There is usually a fixed interest rate, and you can choose the loan length. But because loan amounts can be up to 80% of your home value, this type of financing can be beneficial when purchasing fixer-uppers.
Disadvantages: Loan terms are limited to the length of the loan, which can make it difficult if you end up having to hold onto your investment for longer than predicted. In addition, there are closing costs associated with this type of loan.
3) Hard Money Loans
These loans are for people needing hard cash to purchase properties that require large amounts of renovation.
Advantages: You can get a hard loan within a month of approval, unlike conventional loans that can take up to two months. In addition, hard money lenders are more lenient regarding credit scores and can finance a more significant percentage of a home’s value.
Disadvantages: These loans are not backed by the government, so there is a high risk of losing your investment if any problems arise with the home. This type of loan also has a shorter repayment time and a higher interest rate, which means that you will be responsible for the total amount of interest if your property does not sell in a set time frame.
4) Joint Ventures
You can pool your resources with someone else to purchase and fix up a property with a joint venture.
Advantages: Joint ventures can be a good way for people having difficulty finding financing to purchase homes. In addition, this type of arrangement is helpful when buying homes in areas where you don’t have much equity to offer the seller.
Disadvantages: Joint ventures are risky because both parties have put their assets on the line to purchase a home. If something goes wrong or you can’t agree on any terms, it could affect both of your finances.
5) Rehab Loans
If you have a credit score that qualifies, you can use a rehab loan to purchase homes for fixing up then sell for a profit.
Advantages: These loans are designed to offer competitive interest rates, but this type of financing often requires a larger down payment. You can also use the profits you make from the sale of your home to help pay back this type of loan.
Disadvantages: These loans have a strict repayment schedule based on the length of time you hold onto your property. If you end up having to hold on to your investment for longer than expected, you could end up owing more money in interest.
6) Private Money Loans
Private money financing is a way that many people get the cash they need to purchase and fix-up homes.
Advantages: These types of loans can be very flexible. In addition, private lenders offer higher loan amounts than traditional banks, so it’s easier to get mortgages for more significant properties.
Disadvantages: Interest rates and loan terms can vary, and private lenders may require that you have a substantial down payment. This type of financing also has shorter repayment terms, so if you cannot sell your property in a certain amount of time, you could end up owing more in interest.
When considering which financing option to choose, it’s essential to evaluate your financial situation and weigh the advantages and disadvantages of each one. When deciding on any loan, make sure there is no prepayment penalty so that if things go wrong or need more time than expected, you won’t end up owing more than what was initially agreed upon!