Flipping houses can be a great way to make some extra cash, especially if you’re handy and can do a majority of the work yourself. You might think you need a substantial amount of money in the bank in order to purchase houses to flip, but that’s not always the case. So, what do you do if you don’t have extra capital sitting around, but want to get into the fix and flip game?
Your first step is to find an affordable investment property that needs some work. It’s best to flip one house at a time, particularly if you’re just starting out and will be doing the bulk of the renovation work on your own. It’s important to do your research thoroughly in this phase. Focus on finding homes in desirable neighborhoods that are either established or quickly up-and-coming. You can look for a property that needs to be taken down to the studs or you can start slower with a place that just needs some minor face lifts to find the right buyer. Either way, budget out all costs and research comps in the area to ensure you’re on track for getting a return on your investment (ROI).
There are a few ways to tackle funding your project when you don’t have cash on hand to buy your investment property.
- Find a professional partner to invest in (buy) the house for you. Eventually, you’ll build up cash and credibility to buy houses on your own and/or take out loans to buy houses to flip, but in the beginning, you can try to find someone who is willing to front you the money. How you pay them back will need to be decided between you and the investor, but the investor is going to expect ROI from the money they put in, which usually involves charging interest and/or keeping a percentage of the profit. You’ll also want to discuss how involved in the day-to-day your investor partner wants to be and decide how major decisions will be made up front. Will they be a silent partner or someone who wants to get into the weeds with you?
- Ask friends and family to fund your fix and flip. Involving friends and/or family in business is always a risky move and should be done with extreme care and forethought. There will be a certain level of emotion when making the ask, even if you’re completely prepared with a thorough presentation for why you need the money and how you’ll use it. If you’re going to ask friends and/or family for help, go in with details on how you’ll pay them back (with interest, if you can) as quickly as possible. Like any business arrangement, make expectations clear from the beginning and stick to your word. You could even hire a lawyer to help make the partnership legally solid for both you and your loved one(s), ensuring you’ve thought of every implication before moving forward. Many personal relationships have been ruined over business plans gone wrong, so tread carefully.
- Apply for a hard money loan. Hard money loans come from private lenders (instead of traditional banks that typically just offer mortgages) and are short-term loans designed specifically for projects like fix and flips. The interest rate is usually higher than a traditional bank, but hard money lenders can close loans in a matter of days and can create more tailored and flexible loans than a bank can. Hard money lenders will also fund borrowers who might not qualify for a loan at a traditional bank, because they take into consideration more factors than just your credit score and available capital. At Walnut Street Finance, we not only fund fix and flips, but we use our depth of industry knowledge to help our borrowers successfully complete their projects too.
Using other people’s money doesn’t mean you’re not capable of doing it on your own--it just means you need a little extra support as you get your flipping business off the ground. If you’re going to seek assistance to help you buy and flip homes, it’s important to be sure of what you’re getting yourself into. If you plan appropriately and execute diligently, you’ll find yourself well on your way to a successful career in real estate investing.