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.