Loans for flipping houses: A guide for beginners

House flipping shows are popular for a reason. There’s something incredibly satisfying about watching a worn-down property transform into a modern, sought after home in just 30 minutes of television – but the reality isn’t quite as simple.

And you know that dramatic moment when the flippers discover an unexpected roadblock, like black mold or a cracked foundation? It’s slightly less entertaining when it’s your financial security on the line.

Despite the risks, there’s a reason so many Americans are willing to take the gamble. According to Statista, a market and consumer data company, the average profit made per house flip in 2021 was about $67,000 – the highest profit margin in the industry in over a decade. But as the old saying goes, you have to spend money to make money.

So, exactly how much capital should you expect to spend and what type of financing should you consider to lighten the load? In this article, we’ll review the major costs associated with house flipping and the loan options you should know about.

How much does it cost to flip a house?

Buying any house is costly, but the cost to buy, rehab and flip a house can be costlier. By definition, house flipping is the practice of buying property as a real estate investment with the intention of holding it for a short period of time, then reselling it for a profit.

But before you earn that profit, you should expect to pay the following costs:

• Down payment: With a traditional mortgage, you can expect to pay 3% – 5% or more for a down payment on a primary residence. If you don’t qualify for a traditional mortgage, the down payment costs associated with other types of financing may be significantly higher.
• Homeowners insurance: Even if you only plan to keep the property for a short period of time, you still need to protect your investment and pay homeowners insurance.
• Utilities: You’ll probably need access to services like water, natural gas and electricity while you’re rehabbing the house. You may think you’re prepared for these costs, but they vary by location. We recommend checking with local utility providers to estimate your potential expenses.
• Property taxes: You will pay property taxes on the house you’re flipping, but you should also be prepared to pay real estate transfer and capital gains taxes once you resell the property.
• Renovations and repairs: These costs will vary significantly depending on the types of repairs and renovations you choose. Choose your upgrades wisely and don’t bite off more than you can chew. Labor, materials and equipment costs add up quickly, and you may uncover some surprise problems along the way. We suggest keeping an emergency fund on standby to cover any unexpected expenses.
• Marketing: Once the work is done, it’s time to market and sell the house. A real estate agent can help with this for a commission that’s typically about 6% of a home’s purchase price. But if you’re looking for ways to save money, you can try to market the house yourself. Just keep in mind that, without an agent’s expertise, it may take significantly longer to find the right buyer – and you may end up paying more in other costs while you wait.

Types of loans for flipping houses

From crowdfunding to mortgages to loans and lines of credit, there are a few financing options for flipping houses. Different types of lenders offer different types of loans to flip houses, presenting borrowers with several options to consider.

We’ve compiled a list of financing options and described some of the most popular loans borrowers use to flip a home.

One of the most common types of financing used by house flippers is the hard money loan. Hard money loans are short-term loans offered by certain private lenders and credit unions. The accelerated approval timeline of these short-term loans can be helpful for house flipping. A traditional mortgage loan application takes much longer to process.

When you find a property to flip, you need to act quickly, and a hard money loan may be one of the most convenient ways to get money fast. But you’ll pay for that convenience. Hard money loans have hefty interest rates reaching as high as 15%.

Hard money loan pros and cons

The main advantages of a hard money loan are the fast approval process and less rigorous underwriting process. Some disadvantages of hard money loans include higher interest rates and large down payments. And the lender may require proof that you’ve successfully flipped homes in the past.

Looking for a more cost-effective financing option? You might consider a cash-out refinance. With a cash-out refi, you can borrow against the existing equity in your home.

Of course, this only works if the property has enough equity to cover the cost of the flip. It’s important to note, using your personal residence as collateral for funds to flip a house is risky. You don’t want to lose your home in the process of flipping another, so be sure to discuss your options with your lender and understand what is at risk.

Cash-out refinance pros and cons

A few cash-out refinance advantages include access to a potentially large sum of money, tax benefits and a long repayment period. Some drawbacks are upfront closing costs, potentially high interest rates and the risk of foreclosure if you refinance your home and can’t repay the loan.

Home equity loan

You can capitalize on the equity in your home with a home equity loan. Home equity loans are a type of second mortgage you pay off with a monthly payment separate from your primary mortgage payment.

Unlike a cash-out refinance, which changes the terms of your primary mortgage, a home equity loan is a loan that places a second lien on your home and carries a separate payment.

Home equity loan pros and cons

Home equity loans have many advantages, including fixed interest rates, so your payments never change. They have lower interest rates, and you can use the money for any purpose. Some drawbacks of a home equity loan include paying closing costs and making an additional monthly mortgage payment. Because your home is used as collateral to secure the loan, you may be in danger of losing your home if you default on your mortgage payments.

Home equity lines of credit

Another option is a home equity line of credit (HELOC). HELOCs also use your home as collateral, but they work like credit cards.

Like a home equity loan, the amount of money a HELOC can extract from your home is based on the amount of equity you’ve built in the home. And how you access and repay that money is a little different, too.

Instead of receiving a lump sum of money, a HELOC allows you to borrow against your line of credit for a certain period of time, often for as long as 10 years. The period when you can withdraw money is known as the draw period. You have the flexibility to take money only when you need it.

When the draw period ends, you enter the repayment period, which can last as long as 20 years. During the repayment period, you can no longer withdraw from your line of credit and start to pay off the principal and interest on the remaining balance.

HELOC pros and cons

The primary advantages of a HELOC are no closing costs, being able to borrow just what you need when you need it and flexible repayment options. A few disadvantages are recurring fees and potential prepayment penalties depending on your loan and lender. And like other financing options we’ve discussed, you may lose your home if you can’t keep up with your payments.

Personal loans

With a personal loan, you can take advantage of qualifying in less time – sometimes in as little as 1 – 2 days. And you won’t need to use your home as collateral.

Your lender may offer a high interest rate, but for some borrowers, higher interest rates are worth securing financing in almost no time at all.

Personal Loan Pros And Cons

The main advantages of a personal loan are receiving a lump-sum payment upfront and generally faster funding times. Also, you aren’t required to provide collateral to secure the loan. Some disadvantages include added debt and the addition of another monthly payment to your budget.

How to get a loan to flip a house

To get a loan and start house flipping, you’ll need to meet certain lending criteria, like credit score minimums and down payment requirements. The specific requirements you’ll need to meet will vary by the type of financing you choose, the lender you’re working with and the type of property you have in mind. While some steps differ from the traditional home buying process, here is a list of the steps you’ll need to take to get a loan to flip a house:

1. Have your financial information ready: Your financial information includes bank statements, proof of employment and credit history.
2. Calculate the ARV: Because you’re borrowing money to fund a house flip, the lender will request blueprints, cost estimates and the property’s expected after-repair value (ARV) to ensure it’s worth the investment. ARV is calculated by adding the property’s current value and the value of your planned renovations.
3. Find a lender: Depending on your financial situation and the type of financing you’ll need to fund your flip, it’s important to shop around for a lender that can give you the best rate.
4. Decide on a loan: After you’ve decided on a lender, you’ll need to choose what type of financing you’ll want to use to flip your investment property.
5. Purchase property: You can buy the property once the lender disburses the funds.
6. Close on the home: At the end of closing, you will officially get the keys to your new house flip.
7. Start house flipping: After closing, you can start making repairs and renovations to get the home back on the market.

The bottom line: The best loans for flipping houses varies person to person

It’s easy to understand the appeal of flipping houses. For the right person with the right property, house flipping can be an exciting and lucrative real estate investment opportunity. If you’re financing your flip, remember that every loan option has its pros and cons. What may work well for one borrower may not work well for another borrower.

To help determine which loan is right for you, create a budget ahead of time that outlines your costs. Knowing your expected costs can help you determine which loan options are best suited for your needs. And no matter how you finance your fix-and-flip, it’s important to work with a lender you can trust.