Last Updated on September 9, 2019 by Mark Ferguson
It usually takes a lot of money to flip houses. You have to buy the house, pay for the repairs, pay the carrying costs, and then wait for it to sell to get your cash back out to invest again. Luckily there are ways to flip houses without much money and possibly with no money, but it takes work.
Some different options for house flippers can include partnering with another investor, private money, hard money, and even bank money. It could be possible to combine multiple lending options to bring less money to the deal as well. Finally, wholesaling can be a way to flip houses without ever buying a house and therefore you don’t need nearly as much money.
How much money do you need?
The amount of cash you need to flip a house will depend on many factors, but I will go over what I spend on my flips. On some deals, I use a portfolio lender who lends me 75 percent of the purchase price. I also use private money and hard money. When using the bank, I need money for the down payment and the other expenses as well. When using private money or hard money I need less cash, but the financing costs are much higher. Here is a quick break down of the costs on a house flip that costs $100,000:
Carrying costs (property taxes, insurance, utilities, etc.):
Buying costs (closing fees, inspection, recording fees, taxes):
Selling costs (commissions, title insurance, closing fees):
As you can see, I need more than $130,000 in cash to flip a typical $100,000 flip. Our market has gotten much more expensive and I am paying closer to $200,000 per flip now. The more expensive the house, the more expensive all the other costs are as well. I am a real estate agent, so I save money on commissions. Investors who are not agents would need to add even more costs in.
I have up to 20 flips going at once. I would need an insane amount of cash to handle that many properties. Luckily my financing sources are able to give me money for most of these costs and reduce the cash I have invested.
1. Bank Financing
Even though I can spend $130,000 or even $300,000 in cash to flip a house, there are ways to spend much less. I often use bank money, private money, and hard money loans. I also borrow private money from a relative year-round and I use that money to help pay for down payments and repairs. I still use my own money, but financing allows me to buy more flips and make more money. I have more expenses when I borrow money but being able to flip three times as many houses means I more than make up for those extra costs.
Here are some different options to borrow money from banks when flipping houses:
Portfolio lenders or local banks
I use a portfolio lender, which is a local bank for many of my flips. They lend me 75 percent of the purchase price, which leaves me paying the down payment and all the other costs out of pocket. The portfolio lending is the cheapest option interest rate wise but takes the most cash. Right now, I am paying about 5.5 percent on the interest and 1 origination point (a point is a percentage of the loan). Every local bank is different, and you may be able to find better or worse terms.
Portfolio lenders keep their loans in-house and that is why they have different programs and more flexibility than a traditional lender. Some portfolio lenders will loan a higher percentage of the purchase price and some will even loan on the repairs. Portfolio lender rates will also vary greatly from bank to bank.
Before lending guidelines changed a few years ago, we used a different lender who gave us a $700,000 line of credit that could be accessed at any time. That bank changed its policies and eventually went out of business. I have not seen any offers like that in the last ten years. If you can find the right portfolio lender, they may offer you financing for all the costs on a flip. Most lenders will only loan that much money to very experienced investors, who are very solid financially.
If you have other sources of financing, you may be able to flip houses with no money using a bank loan. I borrow private money from family all year long. That money is always available to me and I do not have to pay it back. I also have a line of credit on my personal house. That money is also available to use for down payments and repairs. The line of credit and private money is not enough to cover all the costs, but it sure helps. If you are only doing one or two flips at a time you may be able to flip with no money using that combination.
Line of credit
I have a line of credit against the houses I live in and I used to have one against some of my rentals. In order to get a line of credit, you need to have equity in your properties. I have always gotten amazing deals on every property I buy which has given me instant equity.
It is much easier to get a line of credit on the house you live in than an investment property. Many banks do not even offer lines of credit on investment properties. The nice thing about a line of credit is that when you are not using the money, you are not paying any interest on it.
You could also refinance properties to take cash out, but you will be paying interest on that money whether you are using it or not. It can be much easier to refinance a rental that it is to get a line of credit against it. The advantage to a refinance is the loan term is longer and the rates more stable. Lines of credit are usually from 1 to 3 years long and the interest rate is variable which means it can go up or down.
2. Hard money lenders
Hard money lenders will often let you borrow much more than traditional banks. You can even finance all the repairs with many hard money lenders. The rates and fees are usually much higher with hard money loans. The interest rates can range from 8 to 15 percent with the points ranging from 1 to 5. A hard money lender will often lend up to 90 percent of the purchase price and 100 percent of the repairs. There are some hard money lenders that will lend all of the money, but they are the most expensive with rates and points.
Hard money lenders are not banks, but companies who borrow money from investors at a certain rate and then lend that money to other investors at a higher rate. Hard money lenders focus on short-term loans that are geared towards flippers. Many hard money lenders will lend on the ARV (after repaired value), not the purchase price. That means if a house will be with $150,000 when it is fixed up, they would lend 70 percent (percentages will vary) of the fixed-up value, not what you buy the home for.
For example, if I buy a flip for $100,000 and it will be worth $150,000 when it is fixed up, my portfolio lender will lend me $75,000. If a hard money lender will loan 70 percent of the ARV, they would lend $105,000 on that same property. If the home would be worth $200,000 after repairs, they would lend up to $140,000 on the deal.
If you get a good enough deal you may be able to borrow almost all the money needed to flip a house from a hard money-lender. Most hard money lenders want the investor to have some skin in the game. Many hard money lenders are only going to lend to experienced investors who are solid financially. However, some hard money lenders will work with beginners. The more experience you have, the better rates and terms you will get. Also be prepared for the hard money lender to have numerous fees such as appraisals, doc fees, draw fees, etc.
The hard money lender will also not be lending you the carrying costs. They will not pay for the insurance, property taxes, utilities, or HOA dues. When paying for the repairs most hard money lenders use a draw system. That means the investor makes the repairs and after a certain point the hard money lender will release money in “draws”. The lender does an inspection to make sure the work is done, and then they release the money.
While you need less money when using hard money, you still need some money. You could use the line of credit or private money to supplement a hard money loan.
3. Private money
Private money is money you borrow from private investors or people you know. You will hear many companies advertise that they are private money lenders, but they are simply hard money lenders using a different name. Private lenders can be family, friends, co-workers, other investors, or a stranger from Nigeria. Just kidding, don’t ever fall for the private money scam where they promise you a 5 percent interest rate on $5 million dollars. I borrow private money from many different sources on each deal and all year round. The rates I pay range from 6 to 12 percent and I pay from zero to 2 points. These rates can vary based on the relationship and need of the investor.
Hard money lenders take money from private investors and then lends it to different investors to complete real estate deals. If you can find private money lenders directly you can cut out the middleman and borrow money at much lower rates. If you want to borrow private money you will have to convince whoever you are borrowing from that you are a good investment and you won’t lose all their money.
If you find the right private money lender you may be able to borrow the entire purchase amount, plus repairs, and other costs. The amount the lender will give you all depends on the comfort level between the investors, the experience, and the deal. Finding private money is not easy and many times private money comes from friends and family. I pay six percent on the private money I borrow all year round, but rates will vary greatly. I also pay up to 12 percent on short term deals for one house. You can structure private money to fund an entire deal or use it with other types of funding like a portfolio loan.
Trust is a huge issue when finding and convincing private money lenders to invest with you. It is very easy to lose trust, but very hard to gain it. The more trust you can build by doing business the right way, the better chance you have of finding private money. You also need to remember that private money is a win/win situation. You are helping the investor by paying them a very high rate of return. They are helping you by financing the real estate deal.
Another option for financing flips is partnering. A typical partnership involves one party supplying all the money and the other party doing all the work. For supplying all the money that partner may get from 40 to 60 percent of the profits. The other partner who finds the deal, repairs it, markets it, and sells it gets from 40 to 60 percent as well. This is by far the easiest way to flip a house with no money, but you are giving up a huge chunk of the profits.
Finding a partner will be like finding a private money-lender. They will both be people you know in most cases. The only difference is in how the deal is structured. It is usually cheaper to pay the investor an interest rate on the money he invests, instead of a percentage of the profit.
Crowdfunding is a newer type of lending that is similar to hard money. A crowdfunding platform uses the internet to find investors to fund fix and flips and many types of investments. The investments can be very small ($5,000) and many investors will pool their money together to fund a deal. The crowdfunding company finds investors to lend the money too and charges those investors a higher rate than what the funding investors are making. The crowdfunding company will again want experienced investors who are solid financially. The amount they lend will depend on how good the deal is and how experienced the investor is. Rates and terms are very similar to hard money.
6. Wholesaling Real Estate
Another option to flip houses with no money is to wholesale. I do not like to use the term flipping houses and wholesaling together, but many other investors do it. When you wholesale a house you often never take possession of the home. You use a contract that can be assigned to another investor or you double close the deal. In both cases, the investor does not need any of their money to close the deal.
Wholesaling is a great way to get started in the business, but it is not easy. It takes a lot of work, a lot of knowledge and a lot of persistence to make it in the business. While you do not need money to buy or fix up the house when you wholesale, you do need money to find the deals. Most wholesalers find deals by mailing postcards, driving for dollars, or hunting for For Sale By Owners. All those activities take some money.
It takes a lot of hard work and money to flip houses. When you are just starting out it is going to be very hard to find financing if you don’t have any of your own money. Wholesaling may be a better way to get started because it can be done with virtually no money.