Flipping houses continues to be a lucrative business — when done properly. It hit its fastest pace over six years in 2018, with house flippers making an annual average gross profit of $69,500.
Returns on investment (ROI) may have dropped from 47.8 percent to 44.3 percent between the first and the second quarter, but profits remain. Certain markets prove more lucrative, too. House flippers in New York, Chicago, and Miami-Fort Lauderdale are among those who see the high ROIs and home sales.
If you’re interested in entering the market but uncertain about using your hard-earned savings to finance a high risk-reward proposition, then don’t worry. Flipping houses without money is not as hard as it seems.
Using OPM to Finance a Flip
You’re likely already familiar with the process of using OPM or “other people’s money” to finance your venture. OPM includes car loans, mortgages, and other types of loans.
OPM for financing a house flip (or other real estate investments) seldom involves institutional financing. Traditional mortgages from banks and brokers can take an average of 45 to 60 days to process. However, house flippers rarely have the luxury to wait that long for funding; other house flippers or real estate investors could swoop in and purchase the property during that time.
It’s better to take out a loan from individuals or investors. House flippers in Miami often use hard money loans and private money loans to finance their flipping projects and enjoy flexible repayment terms.
Hard Money and Other Fix and Flip Loans
Fix and flip loans are short-term loans that offer fast closing on a property intended for rehabilitation or improvement and immediate selling. These include:
- Cash out refinance loans
- Home equity line of credit
- Investment property line of credit
- Bridge loans
Hard money loans, also called rehab loans, are ideal for novice flippers who plan to work with a licensed contractor or for investors who have completed at least two house flips. You can receive a hard money loan approval in just 24 hours (and 10 to 15 days for funding) and negotiate repayment schedule flexibility, depending on the lender. Take note that you’ll need to have a minimum credit rating of 550 to qualify.
Interest rates of hard money loans range between 7 percent and 12 percent. While hard money loans don’t come cheap, the silver lining is that you won’t be paying the interest for the whole year-long loan term. A successful house flip (and resell) can pay off in as fast as six months.
The Right Amount of Renovations
The success of your house flipping project may depend on the condition of the property you buy. Anyone who’s ever done a home renovation or remodeling project knows the importance of what’s below the surface. Unstable foundations and black mold rack up renovation costs and translate into losses.
Make sure you choose a structurally sound house that only needs superficial renovations to get the best value for your money. Quick updates like refinished cabinets, new hardware, landscaping, and paint jobs are relatively inexpensive and fast projects. Steer clear of homes that need roof replacements, rewiring, or plumbing overhauls as these require more time and cash to fix and flip.
Do your research before entering the world of house flipping, especially if you’re banking on using OPM to finance the flip. With the right loan and property, you’ll have no problem repaying your loan and enjoying your profits.