Flipping houses is a major personal and financial decision. It is a large investment that may or may not turn a good profit. There is undoubtedly a sizeable market for flipping houses. According to ATTOM Data Solutions, there are 207,088 houses that were flipped in 2017. 138,410 separate entities (individuals and organizations) were responsible for the house flips—a 4% increase from 2016.
House flipping, if done successfully, can be a good investment stream of income. This doesn’t take away from the fact that for the average person, it is a huge risk for their financial security, potentially causing a loss of thousands of dollars. What can you expect will happen to your credit if you want to flip a house?
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What is the costs of flipping houses?
It is no secret that purchasing and flipping a house is a costly endeavor. It is not as simple as purchasing a house and reselling it. If you are a beginner at house flipping, it is important to understand the costs involved:
- The purchase price of the house
- Inspections and appraisals on the property
- Rehab costs
- Holding costs, closing costs, and realtor fees
- Down payments on loans
- Loan interest and fees
The average house sits on the market for about six months before it is sold (this can vary greatly in different markets). This is the time from when the house is bought to when it is ready to sell according to RealtyTrac, a real estate information company. The carrying costs of the property will keep adding up each month that it sits on the market. Being prepared to pay these expenses after the renovations are done will help you budget accordingly.
How does credit history affect your ability to flip a house?
To flip houses, you must have good credit already established if using a conventional bank. Without good credit, you will not be able to obtain the needed funds to complete your project or do so successfully. It is possible to get loans and deals with a low credit score using other lenders, but you will have much more success overall with good credit.
How Will Flipping Affect your Current Credit Score
Yes, flipping a house can affect your credit score if you are not careful. This is why it is best to flip when your credit is in a good range. There will be various balances that need to be paid since there are a lot of costs involved with purchasing, renovating, and selling a house. Missing a payment will result in late fees on top of your incurring interest. It will also drop your credit score, deeming you a liability.
How much your credit score will be affected will vary depending on a number of different factors. Naturally, the later a payment, the more your credit score will be negatively affected. There are different models for evaluating various pieces of information to determine your credit score per credit reporting agency. While there are various factors that will affect your score, how much so specifically will vary per entity.
Materials for renovations are expensive. Another way your credit can be affected is by running up high credit card balances, regardless of your payment history. You want to stay in a lower credit utilization rate (30% and below) to avoid a dip in your credit score.
Experian describes a credit utilization rate as “…how much you currently owe divided by your credit limit.” What this ultimately does is show your credit issuer that you are not overspending and are responsible with your credit and money. Luckily, running up your balance is temporary, and your score will improve with a lower reported balance. However, this will not always change your score immediately.
Financial Tips for Flipping Houses
Every investor has their own needs, and knowing what they are and how to finance them is key to turning a profit. There are ways of ensuring your credit does not suffer when flipping a house and to help you prepare for your investment:
- Do not add new lines of credit: if you plan to purchase and flip a house, it is wise not to apply for consumer credit cards. Doing so makes you a liability because it shows that you have a various line of credit where you can fall into debt.
This causes your credit score to decrease. It is better to have only a few credit lines open that are long-standing with good payment history. Close any lines of credit you are not using as well.
- Do not go over your credit limits: buying materials for renovations can rack up a large bill, but not exceeding your credit limit is crucial for your credit score. Even if it is only by a small amount, your credit can drop significantly. According to Rehab Financial Group, even if your credit issuer provides the overage protection, it will still affect your credit score.
- Use cash when you can: cash is a great method of payment because it will not cause you to overspend—creating or adding to the debt. Many investors may only accept down payments in cash as a way to protect themselves from going into too much debt if the project does not work out.
- Follow the 70% rule: when you find a potential house to purchase, it is said that you should not pay more than 70% of the ARV (after repair value) of the house subtracted by the estimated cost of repairs. This is to ensure you are not overpaying for a property in order to maximize your profit.
For example, if your ARV is $200,000 and the house needs $45,000 in repairs, you should not pay more than $95,000 for the property to avoid overpaying.
- Know and understand your finance options: a common mistake new house flippers make is purchasing a house without understanding the ins and outs of house financing. Know the various ways and types of loans that can be obtained before purchasing a property and how you will purchase it.
Thank you to Lexington law for providing this post. I have been flipping houses for many years and never made a late payment on anything. Yet my credit score is not as high as you would think due to many of these factors. Banks will still lend to me, and my credit is not bad, but if you have credit that is borderline, you need to be careful when flipping houses not to drop it lower.
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