Inspired by television shows featuring investors that fix and flip properties in what feels like a blink of an eye, there are many people who want to try their hand at real estate investing. This is a definitely a type of investment where it “takes money to make money.” You’ll need money to acquire the property as well as funds to fix it up. But many lenders are still cautious after the 2008/2009 downturn, so you may have to get creative to find the funding you need.
Here are four places to find funds for your fix and flip real estate investing business.
1. Private Investors/Hard Money
“Hard money” is a term used to describe money lent by private investors. Wealthy individuals may want to invest some of their funds in real estate projects, but don’t want to do the work themselves, so they lend money to those willing to do it. Or friends and family may want to invest in real estate but lack the expertise or time to tackle it. They too can be sources of funding.
Hard money is likely to be one of the more expensive options you’ll find, unless you’re lucky enough to find friends or family members with money they are willing to invest, But it is often popular with real estate investors because it can be faster and more flexible than other types of financing. Most real estate investors find hard money lenders through their personal contacts, local real estate networking groups or through referrals from real estate or mortgage professionals. Be very wary of ads for hard money posted online on sites such as Craigslist. They may be scams.
Be especially careful if you are a novice. It’s wise to get a financing contract reviewed by a real estate attorney to make sure you understand the terms of the agreement, as well as what will happen if you are unable to finish the project as planned. If the lender requires a personal guarantee, for example, you will be on the hook for the loan even if the project is a complete failure. In addition, there may be prepayment penalties, which can be frustrating if you are lucky enough to sell the property quickly.
2. Credit Cards
Credit cards offer fast flexible financing. While interest rates on credit cards often range from 12 – 21% or higher, they can be cost effective in the short run. They may be used in one of several ways:
- Cash advance: Some credit cards will allow you to get cash in the form of a cash advance, which usually carries a higher interest rate than purchases. There may be a cash advance fee of around 2% as well.
- Balance transfer: Some may offer low-rate balance transfers. You may be able to use one to pay off balances you’ve incurred buying materials for your job. Or you may be able to request these funds be deposited in your bank account so you can pay for labor or other expenses that you can’t put on plastic.
- Supplies: Finally, credit cards can be useful for purchasing supplies for the job. Make a purchase right after the close of your credit card card billing cycle and you can boost your cash flow by getting interest-free use of the card issuer’s money for almost two months. (That only works if you don’t carry a balance and your card has a grace period.)
Using credit cards for real estate financing can be both an art and science. Getting credit lines of $10,000 to $25,000 or so usually is not difficult for someone with good credit and sufficient income. Above that, some investors turn to credit card stacking, which helps them secure larger total lines of credit.
3. Personal Loan or Line of Credit
If your credit scores and income are strong enough, you may be able to qualify for a personal loan that you can use toward your fix and flip project. Many lenders require personal credit scores of at least 620, and some higher. One advantage of this type of loan is that it may offer a predictable payment schedule; that’s particularly true of loans with fixed interest rates and payments. However, keep in mind that personal loans can affect your personal credit scores, which in turn could affect your ability to get other types of financing.
4. Mortgage Financing
It can be hard to find a traditional mortgage to purchase one of these properties. It may be possible to purchase a property as your primary residence, fix it up and sell it, but it’s not good to mislead a lender about your intended use of the property, and you can only get away with that so many times before it will start raising questions. It may also be possible to get financing for an investment property you plan to keep and rent out. You’ll still need a down payment, though, plus financing to make repairs.
Here are two types of mortgage financing investors may use successfully: a “cash out refi” or home equity lines of credit. With a cash out refi, you refinance a property for more than the current balance on the mortgage. The extra funds (after loan costs) is cash you can spend as you choose. A home equity loan or line of credit is a type of second mortgage that gives you cash to spend on whatever you choose.
In both cases, the borrower gets a loan secured by equity in a property they own (either the home they live in or another investment property). Because the loan is secured, the cost may be much lower than other types of financing. However, these loans will require good credit scores and sufficient income to pay back the debt. If your project fails, you’ll be left with a large secured debt that will be very difficult, if not impossible, to wipe out in bankruptcy. So be careful.