Flipping houses has become more and more popular as the years go on, and not just because of reality TV. Not only is it a great way to make a few hundred thousand extra dollars, it's also a great way to let out your inner creativity. While it is such a great thing to get involved with, it isn't always easy to get started.
Flipping houses may be more challenging than you actually think. In order to begin the process, you have to have some cash to fund the project. Not many people have thousands of dollars just laying around, so you're going to need to borrow the money from somewhere. Here are some of the best ways to get money for your home flipping project.
Hard Money Loans
If you're young, chances are you don't really have outstanding credit. With student loans and the capital requirements of buying a house, it can be hard to get a traditional loan with a mediocre credit score. If you still want to flip houses but don't have really great credit behind you, a hard money loan may be your answer. Hard money lenders are able to provide a person with short-term loans that will need to be repaid within one year (or a little more than that in some cases). They're perfect for someone who's been rejected for regular financing, but because of the short repayment periods the interest rates can be pretty high. Hard money loans offer higher interest rates, but lower loan to value ratios. Hard money interest rates can start at 15%, 18%, or higher, but they are often the ideal vehicle for investing in real estate. Keep this in mind when you are considering where to get your money.
Ask Friends and Family
If you have a very strong support system, chances are you might have family and friends that are willing to lend you a few dollars in the form of a private loan to help fund your project. Asking someone close to you for money will eliminate the need for credit approval. Even though this seems like a great route to go, it's so important to make sure you have everything in writing. Even with friends and family, it's best to get everything in writing.
Home Equity Loan
If the above two options aren't right for you, consider a home equity loan. Home equity loans aren't private loans; they're basically just a second mortgage. Like any other loan you have taken out in the past, a home equity loan does have a fixed interest rate and a fixed term of the agreement. While they typically come with a variable rate, you are able to draw against the credit line if you're in need of some extra money. The major problem with a home equity loan compared to a private loan is that your house will act as a form of collateral. If you don't pay the money back or pay a specific amount by a specific time, the bank could ultimately choose to foreclose on your house.
Benefits of a Hard Money Loan Versus a Home Equity Loan
As stated above, a home equity loan requires your primary residence to become a form of collateral. If the project ultimately fails to succeed, you could be out of a home. However, a hard money loan usually uses the investment property itself as the collateral, which offers higher potential rewards and lower potential risks.
When flipping houses for the first time, there are few ways to obtain the money needed for the project. Take a look at three options listed above and figure out which would work best for your financial situation and lifestyle.