Starting a house flipping business requires substantial capital. You need to have the financial capacity to get the best out of your investment. Most times, financing a house flipping business requires securing capital from lenders, loaning agencies, or partners.
If you get enough funds to ensure cash flow, you can purchase some properties and flip them for money. As a flipper, the importance of cash or working capital can’t be overemphasized. Having good working capital ensures you can buy and sell at the right time. If you want to explore some ways how to finance your house flipping venture, read on.
1. Take Bridge Loans
Bridge loans, also known as bridge plans or bridging loans, are short-term loans taken for about two to three weeks, usually until the maturation of a financial arrangement. You can take a bridge loan to finance your house flipping business, especially if your other financial arrangements are taking time to become active. Click over here to know more about bridge loans.
2. Apply For Fix and Flip Loans
One of the ways to finance a house flipping business is to take loans you can repay when the flips are complete. These loans can be taken from either of the two categories of lenders: the institutional lenders and the private lenders.
- Institutional Lenders: Banks and mortgage companies are classified as institutional lenders. They offer loans with low-interest rates, typically because they are backed by the government. To get a loan from institutional lenders, you must ensure you have a good credit history, a down payment of about 10-20%, and a steady income sufficient to pay the loan. However, a crucial disadvantage of institutional lenders is that it takes a long period to process the loan.
- Private Lenders: Private lenders would be the best bet when it comes to fast processing of loans. These are groups of individuals that lend money to real estate investors. If you have good house flipping skills with profitable returns, you can build a mutual relationship with private lenders. They would provide the cash when you need it, while you reward them with good returns after flipping the house.
It is important to weigh each option and decide whether to get loans from institutional lenders or private lenders to bring your house flipping business into full action.
3. Receive Hard Money Loan
A hard money loan is a short-term loan where you use assets like real estate properties to get loans. An advantage of the hard money loan is it takes less than about two weeks. The lenders focus on the value of your assets other than your background. Hard money loans could be a good option for your house flipping business.
4. Accept Funds From Friends and Family
If you have friends interested in real estate, they could fix up loans for you at friendly rates. If family members are willing, they could invest in your house flipping business without even looking into your credit score, especially if they trust you. However, just because they are family and friends doesn’t mean you shouldn’t make formal agreements and documentation. All agreements should be well documented, such as the interest rates and loan repayment plan.
5. Build Partnerships
This is another significant way to finance your house flipping business. In this case, the investor in your house flipping business has an ownership interest in the property, called Equity. In partnership, you don’t have to pay for the cost of the money borrowed. Negotiations will be done between partners to determine the percentage of ownership of each person. Decisions must be made based on what is fair and reasonable for every party.
6. Organize Seller Financing
To finance your house flipping business, you can also organize seller financing. In seller financing, the seller provides the partial or full cost of purchasing the house. That way, the seller becomes a private lender. It is then left for you to work out the interest rate, payment schedule, and all the terms and conditions of the loan with the seller. Seller financing is a preferable option, especially for houses requiring extra renovations.
7. Join Investment Clubs
Another good way to network with potential investors is to join local investment clubs. You expose yourself to great opportunities to learn and grow when you build connections with people, especially those that have experiences in house flipping. There is nothing wrong with asking for their contacts and business cards and discussing business goals and ideas. You can even run some collaborations with terms if the terms are fair. Getting investors to invest in your business could mean more finances for you.
There are several ways you can finance your house flipping business. You could partner with other investors or borrow from institutional or private lenders. Before choosing an option, make sure you weigh the pros and cons. Also, remember to carefully calculate and generate management plans that ensure timely returns on investments.