Financing Your Flip

 How to Finance Flip Renovations: Rental Equity and Beyond

How to Finance Flip Renovations with Your Rental House Equity

Renovations are an inherent part of fix-and-flip real estate investing. The only question is: How will you secure the funds for your flip renovation? You can use savings or traditional loans, or you can even use the equity from rental homes you currently own.

Let's take a closer look at the many ways to finance flip renovations.

 

Cash: Renovating with Savings

The ideal financing option is to fund your flip project with savings. If you can pay in cash, you don't have to worry about loans, interest rates, or repayment schedules.  Your only concern will be staying within the exact budget of what you have saved.

Of course, not everyone has that kind of built-up savings for an entire flip renovation project. That is why there are so many home renovation financing options that allow you to take out a loan or access existing equity while you invest in a new flip property.

 

Home Equity Financing Options

The most common way to finance a home renovation is with equity in other properties. Equity is the amount of a home's value that you already own through mortgage payments. You can borrow against this value to reinvest the money in your home through improvements. Home equity financing options tend to be easier to approve and offer a significantly lower interest rate compared to other types of loans. They also do not require an excellent credit score because the property is used as collateral.

Home Equity Loan

A home equity loan borrows against yourrental house's equity. You can borrow a specific amount up to your equity total or 90% of the home's value. The fixed loan amount can help you define your budget, while the low interest rates make this type of loan more affordable than a private loan. Of course, you will need to have enough equity in your house to match the cost of your renovations.

HELOC - Home Equity Line of Credit

A HELOC is a Home Equity Line of Credit. This is a "revolving" line of credit that allows you to borrow and repay more flexibly. You can borrow what you need, when you need it, up to the value of your rental property's equity. A HELOC ensures that you don't undershoot your budget with a fixed loan amount and makes it easier to borrow the minimum that your costs require. You can also repay what you take out and then borrow again in rotation for the full duration of the "draw period", usually about 10 years.

Cash-Out Refinancing

If you are considering refinancing a rental home at a now-better interest rate than your original mortgage, then a cash-out refinance might be the best option.

Cash-out refinancing is when you refinance a mortgage at a slightly higher amount than you need to pay off the original mortgage. You can keep the difference and use it for home renovation funds. 

This strategy is only advisable if refinancing would lower your mortgage interest rate. However, it ensures that you only have one loan, your rental's mortgage, at a favorable interest rate to pay back. Your renovation funds are now similar to cash-in-hand.

 

FHA Renovation and Rehab Loans

The FHA  or Federal Housing Administration usually provides loans for first-time home buyers. However, they also provide financing for home renovations and home rehabilitation projects if your flip is currently your primary residence.

FHA home renovation loans are a special type of loan designed to ensure homeowners can afford practical or necessary home improvements. An FHA home renovation loan will lend up to $25,000 with a downpayment as low as 3.5% and a low interest rate. Loan terms can range from 6 months to 20 years.

FHS home rehab loans are similar to cash-out refinancing. The FHA will allow you to add a home improvement amount to your FHA refinanced mortgage to use for home repairs. The home improvement amount must be a minimum of $5,000.

 

High-Interest Financing Without Equity

Lastly, there are options to finance a flip renovation project through private lenders. These options tend to come at a higher interest rate, but approval tends to be faster and your individual lender options are far more diverse.

Personal Loans

Personal loans rely on your credit score rather than your equity. A personal loan does not require significant home equity and the structure is straightforward and easy to understand. Personal loans may include an origination fee and an interest rate of over 10%. They may also have shorter repayment schedules.

It is important to compare personal loan options from several lenders, and inquire about home improvement loan offers that do not require equity. Some lenders may have a special interest in supporting local homeowners or investors and provide more appealing terms.

Credit Cards

For small and last-minute home renovations, you might even use a credit card. Credit cards are available immediately to pay for repairs and quick improvements, but are not ideal for large-scale home renovation projects. It is difficult for most people to secure a credit card with a limit that could cover a full-scale project and the interest rate is unfavorably high compared to other financing options.

 

How will you finance your next flip? Contact us to learn more about the financial strategy behind flipping houses and managing a rental home portfolio.

Flips Beginners Should Avoid

 

6 Flips Beginner Flippers Should Avoid

Fix-and-Flip real estate investing is an interesting way to dip your toe into real estate investing. One property at a time, you can grow your profits and your home renovation skills whether your flips or build a portfolio of rentals Many people get into house flipping as a fun way to make money through home improvement projects. However, your profits rely first and foremost on choosing the right house.

If you're just starting as a house flipper, knowing which houses to choose - and which houses to avoid - is essential. We can walk you through the types of houses that are "red flags" and don't make good flips or the investment is too high for someone just starting their investment path.

 

1) Badly Damaged Properties

It's true that the most profitable flips are shabby homes where no one else can see the potential. But watch out for real damage. Major repairs can quickly stack up the renovation costs without significantly increasing your profit margin. Never invest in a home that will cost more to repair than the potential market value increase. In fact, keep your repair costs to less than 1/3 of your potential profits.

This includes homes with sagging roofs, torn out interiors, fire damage, utility damage, or even too-extensive surface damage that would require too-large an investment to fix.

 

2) Homes with "Bad Bones"

They say that a good flip has "good bones". This means that the structure and utility systems are sound. All you need are a few cosmetic improvements to make the home beautiful and livable again. The reverse of this is to avoid homes with "bad bones". Damaged foundations and roofs, ancient and broken plumbing, or flickering and unstable electricity are all signs of "bad bones" that you just can't fix on a flipper's profit margin.

Serious mold infestation is also a red flag. Not only would you need to have the mold fully removed (which can mean cutting out walls), but the spores are dangerous to you and future buyers.

 

3) Homes in Luxury Neighborhoods

Luxury neighborhoods are not good beginner flips because the initial investment is too high, and the buyers expect too much. You would need to invest in luxury materials like marble countertops and real hardwood floors just to upgrade an older home to the luxury standards of a high-end neighborhood. Top-dollar buyers are also always looking for flaws and reasons to pass on a house or bargain down your selling price.

Come back to these homes when your profits have accumulated, and your skills are honed. They can be money-makers, but are not beginner-friendly projects.

 

4) Properties with High Competition

Don't get caught in a bidding war. High-competition neighborhoods and properties aren't ideal for flipping because you'll wind up paying too much to make a good profit. 

Remember, "buy low, sell high" is at the heart of flipping. Your goal is to buy a house where others can't see the potential and give it the ugly duckling transformation so that buyers clamor for it when you're done. 

 

5) Asbestos Risk Homes

Homes built from the 1930s to the 1980s can potentially contain asbestos insulation or paint behind painted walls and popcorn ceilings. Watch out. As long as the asbestos is sealed behind paint, the sellers don't even have to mention it (and may not know, themselves). Watch out! Know a home's construction date and have asbestos tests run before you start stripping back old paint or wallpaper or opening up walls.

If you're not sure, look for another flip that is safer. Homes built after 1990 definitely don't have asbestos.

 

6) Properties Without an Exit Strategy

Lastly, watch out for any property where you can't build an exit strategy. If you cannot easily calculate the improved market value after your renovations and ensure that there will be eager buyers for the finished product, consider other options. This includes properties in strange locations, weird floor plans, inaccessible doors, and other problems that might get in the way of a profitable sale.

 

What are the Properties for Your First Flip?

• Shabby Homes with Only Surface Damage
• Small Starter Homes
• Foreclosures in Good Condition

The good news is that there are plenty of properties that are perfect for beginner flippers. Older starter homes are often your best bet: Little 1-3 bedroom houses in mid-level neighborhoods. Starter homes attract new families when spruced up and buyers who are glad to have a good quality home without expecting extra luxuries like marble or top-tier appliances.

You can also watch out for homes with good bones sold at unusually low prices, such as foreclosers and sometimes estate sales. If you can buy low, apply your skills, and sell high, then it's likely a good place to start.

 

Renting Your First Flips

There are two ways to make money after flipping a house. The first is to resell at a higher price, but the second is to build a rental portfolio. If you can get a good monthly price from renters, you can start collecting an ongoing income that will ROI your investment and fund future investments over time. To learn how to predict the future rental income of a flip, contact us today.