Financing a flip (or fear of financing a flip) is one of the many things that end up stopping people from taking the plunge. Find out exactly what we did and how we got started!
In case you didn’t now, we aren’t finance experts.
We can barely keep our house together – have you not ever seen our yearly “scary” house tour where I just basically go around and snap photos of what our house looks like on a daily basis?
So that’s what our house looks like, but dang it we can flip them and make them look pretty!
Can I tell you a secret?
We did NOT pay for this house in cash. We did NOT have a crap ton of money saved up.
So, how did we do it? Let’s talk. This is gonna be a long post so stay with me. I promise that it’ll be helpful and worth it.
- How To Flip A House With No Money
- Fund The Deal Yourself
- Pros of using your own money
- Cons of using your own money
- Investing With A Partner
- Using Other People’s Money (OPM)
- Private Lending
- Alternative/Hard money Lending
- Creative Financing
- Can I Flip A House With Bad Credit?
- Tips for Budgeting Your Flip House
- How much should you plan for incidentals? (aka. your “oh sh!t budget”)
- How Much Should Stuff Cost?
Takes money to make money, right? Or something like that?
Here’s the good news – you don’t need a lot of cash to start flipping houses. We’ll go through all the details below but the key is to be smart and think outside the box. Let’s dive in!
To be clear, my husband is a realtor and an investor so he knows all the legal things so everything I recommend in this article is legal, but I’m not a lawyer and neither is he so this isn’t legal advice.
How To Flip A House With No Money
Fund The Deal Yourself
But wait, Carmen. I thought this post was about how to fund a flip when you have no money.
Well, reader friend, you’re correct! Just because you don’t have money doesn’t mean that you can’t fund a flip yourself. So here are some ways that you can flip a house with no money and still technically fund the deal yourself.
Home Equity (HELOC)
This is an option we took advantage of when we flipped Beverly. According to Bank of America, a Home Equity Line of Credit (HELOC) is “a line of credit secured by your home that gives you a revolving credit line to use for large expenses”.
A flip house is a large expense. The way a HELOC works is you get an appraisal done on your home. They give you a new appraised value for your home and then the difference between that and what you owe on your house becomes your “line of credit”.
You’re essentially using your house as collateral to get a loan to flip the house.
The HELOC interest rates are fluctuating, similar to a conventional loan, but they are usually slightly higher than those of a conventional mortgage loan.
Potential Issues With HELOC
A potential issue that you may run in to when you are trying to get a HELOC is if your budget for flipping a house is 70k and your HELOC is only 50K, then you have 20k that you’ll have to come up with on your own or with other type of funding. This is just something to consider when shopping for a flip house in the first place.
If you currently rent the home you’re in, you’re unable to take advantage of this because the house you own isn’t in your name.
You can technically get a conventional loan for a flip house but there’s a caveat – it has to appraise for your purchase price. So if you’re buying a huge gut job of a house, it may not appraise for what it’s being sold for and therefore you couldn’t get a conventional loan.
Conventional loans are a great option if you’re doing what’s called a lipstick flip – meaning light cosmetic work, but not anything huge like changing floor plans, adding a second story, wild things like that.
Potential Issues With Conventional Loan
With a bank loan, it will likely take 30-45 days to close which means that if you’re competing for other offers and you can’t close for a month, it is likely a candidate that is paying “cash” for a house and can close in 2 weeks would beat out your offer.
It seems as if a conventional loan isn’t “funding the project yourself”, but it goes against your debt to income ratio, which will play with credit and liquidity and take at least 20% down which requires your money.
You can’t flip a house with an FHA loan because an FHA has to be owner occupied (meaning you have to live there) and most flip houses won’t pass FHA guidelines. Some will, but let’s just say the ones we look at when we are trying to buy a flip house will not.
Construction Loan – FHA 203(k)
If you were going to live in a house and flip it, you can buy a house with an FHA loan.
A construction loan is similar to a conventional loan, except for the construction loan, your rehab budget is built into the loan. So you can use that loan, flip it while you live in it, and then sell it. You don’t have to live in it for a certain amount of time either which is good.
If you have kids or a family, moving into a house that needs to be fully gutted or even is in a constant state of construction is going to be hella annoying.
Ask me how I know.
Also you run the risk of things getting messed up. Meaning if you’re living in a space you’re flipping, it’s going to be hard not to break things, spill things, scuff up walls, etc. So I would suggest this if you have older kids who can keep their stuff together or no kids that currently live with you.
Pros of using your own money
- Free or cheap – Because mortgage rates are so low right now, I think we got our HELOC at a sub 4% interest rate which is STUPID cheap. It’s basically free money. I mean nothing in this life is free, but you know what I mean.
- You have more skin in the game. Hopefully this would mean you’d be more cautious and make really smart decisions. If you lose money and it’s yours, whatever. But if you lose somebody else’s money that’s a big deal. So I guess you could see this as a pro or a con depending on how you look at it.
Cons of using your own money
- I think the biggest issue with using your own money is it ties up your money. If you’re trying to do multiple flips at a time or if you have a family emergency, that money is not available for you to use.
Investing With A Partner
This is also an option that we took advantage of.
With Jordan’s LLC that he has set up for Flint and Feather Properties, he runs that with a business partner.
They have a contract agreement that both parties have to agree to the deal before they flip a house OR if one party doesn’t want to participate, they have to give “permission” for the other party to enter into the deal alone.
This is great because if you don’t have the money to fund the flip entirely on your own, your partner can step in. You can share the investment with somebody which means you share the profit.
So for Beverly, we used a HELOC on our home and Jordan’s business partner used a HELOC on his home and we combined the money to use as our rehab budget.
While this is half the risk, it’s also half the reward which can either be seen as a bad thing or a good thing depending on how big of a risk taker you are.
Using Other People’s Money (OPM)
What is a private lender?
A private lender is someone who has a wholllle lotta dough and they want to invest it somewhere. I don’t know this from experience because we ain’t rolling in the dough over here – precisely why we made our own RH knockoff wood dining table instead of spending 5 Gs on one.
If you’re going to use a private money lender, it is usually best if you’re one who has prior contracting, rehabbing, or project management experience. Something you can show them as a “portfolio” of sorts. It just helps show them (if they’re a “stranger” to you) that you know what you’re doing and their money is safe with you.
Again, remember – losing someone else’s money is a BIG deal. Not cute. Would not recommend. 0 stars.
How can I find a private lender?
So much of flipping a house and getting into the business in general is always going to go back to having conversations. Your personal sphere of influence is a great place to start. Family, friends, friend of a friend, etc. Again, there are lots of people who have large amounts of money who want to invest in something with a good rate of return.
You don’t want to be the person walking around seeming desperate, begging people for money to invest but having conversations never hurt anyone.
There are people who actually make a living investing in real estate and they can usually be found in real estate investment networking groups or even social media like Facebook or Instagram.
I typically think that Facebook is where grammar and conspiracy theories go to die, but unfortunately there are some really positive aspects to it and investor groups like this are one of those said positive aspects.
How do I vet a private lender?
Just like every lender isn’t going to want to give you money, just because someone is offering you a huge chunk of money does not mean that you need to take it.
It’s important for you to vet your lenders before you take their money. You need to know that they are not going to compound the issue by charging you ridiculously high rates or by being difficult about repayment.
With that being said, all that information should be written in the promissory note that you will sign so hopefully that in and of itself should help you decide, but hopefully you’ve had other conversations with other people to make the decision.
Alternative/Hard money Lending
What is a hard money lender?
Most of the time when you hear hard money, you think it’s a mobster who is going to break your ankles if you don’t pay. Or even something like a bookie that you pay to gamble on horses. This is a stereotype and it’s simply not true.
Just like there are good private lenders, there are good hard money lenders too! It is possible to actually like your hard or alternative money lender. A guy that works with Jordan calls it “winning with your friends”.
It’s no different than working with a brand like I’ve done a couple times in the past like Kwikset. They’re an amazing brand to work with, always easy to reach and let me have creative liberty and are supportive along the way.
These type of hard money or alternative lenders are a dime a dozen because they make good money doing what they do because of the high interest rate so interview a couple and see who you vibe with.
Unsolicited Advice: Our Favorite Alternative Money Lender
You guys know I love sarcasm and humor and these guys have it. I mean this is a screenshot of their homepage which makes me giggle.
But they also are great at what they do.
We love the guys at iFundCities because they’re honest and they really do want you to win. They’re based out of Philly, but do work all over the United States. We really love the team over there and were honored to even speak with them on an IG live interview.
They’re not paying me to say this at all, but this is just your favorite non-influencer influencer telling you what works for her in hopes it can work for you!
How can I find a hard money lender?
The good news if you’re scared to have those personal conversations with your sphere of influence, you can find a lot of hard money lenders online.
Sidebar: You really shouldn’t be afraid of having personal conversations with your sphere of influence. This realm of business HAS to involve conversations so if you have a fear of that, this may not be for you because this is going to be way harder for you.
Most hard money needs to be secured with tangible assets that are equivalent to the value of the loan. You have to have some skin in the game to show you’re serious.
Hard Money Lender vs. Private Lender
The difference between hard money lenders and private lenders is that private lenders usually give you a lump sum of the money because they’re investing in you and the project, while hard money lenders do not.
Private lending is more relationship based. Hard money hinges on the project so they pay on a draw system. They help you purchase the property and then when you need money to pay contractors, they send an inspector out to confirm the work has been done and then release funds (called “a draw”) in a bank account so that you can pay your contractors.
When I hear crowdfunding, I think GoFundMe. This isn’t that. Another name for crowdfunding is called syndication and is typically used for larger properties like multi-family or commercial properties.
If you’re interested in a property that is multi-family (duplex, triplex, etc) this crowdfunding could be a great option.
In my mind this operates like Shark Tank. You basically pitch your plan for a house reno to a group of people with a lot of money and ask them each for a certain amount of money and then they all pitch in a certain amount for a certain amount of return on their investment.
This is exactly what it sounds like. Seller financing is when the property owner (or seller) will finance the house themselves to you. This is essentially like getting a loan but instead of at a bank, you get this through the person.
This usually is a good scenario if you know the person (like a family member or really close friend). It’s hard to talk a stranger into doing this. Not impossible, just harder.
This one is somewhat like seller financing, but it’s a bit more complex. In this instance, you would buy the property subject to (or “sub 2”) the existing financing or mortgage.
For example, you have a mortgage on your home. If you wanted to get out of your house and didn’t need to sell it for money, but just needed to get out because of foreclosure, someone could come along and buy it but the mortgage would stay in your name. They would just take over the payments.
The mortgage stays in your name and stays on your debt to income ratio until the house is rehabbed and sold.
Can I Flip A House With Bad Credit?
This is a great question that needs addressing because I have been working on my credit for a LONG time, but several years ago, my credit was TERRIBLE. So the thought of being able to do something like flip a house seemed entirely out of reach.
When you are trying to flip a house with bad credit here are some suggestions:
- Hard money lending is still an option. You will want to check with the hard money or alternate money lender to see what their requirements are, but don’t rule it out! If you have other assets to pledge as collateral, a hard money lender may give you a loan without any down payment if you qualify according to their standards.
- Private lending is still an option. If your grandma has a ton of money to invest, she’s probably not going to ask you your credit score. Private lenders are not bound by the same rules and regulations as traditional lenders and financial institutions, allowing for a bit more flexibility throughout the borrowing process.
- Asset based lending is still an option – Base rates and amounts that they lend are not based on your credit, but on the asset itself.
Tips for Budgeting Your Flip House
A super popular question about flipping a house once you’ve secured financing is, “How much money needs to go where? How do I figure out the amount I need to actually make a profit on the flip house?”
Here are some general tips that we have in our back pocket, but remember these will all vary based on the current real estate market in your area so one may work for us and not for you and vice versa.
Some investors have a base number they want to make per flip. So they may say, “In order for this to be worth pursuing, we want to make $25,000 a flip.”
When searching for properties, they would take after repair value (ARV), subtract out closing costs, then subtract $25,000 and that will give them the number to buy it.
What is the 70% Rule In House Flipping?
This is a pretty popular rule of thumb when flipping a house.
The 70% rule dumbed down is to take your after repair value (ARV) into consideration. The ARV is what the property will sell for after you’ve flipped it.
So, whatever your ARV is, your all in number for flipping a house should be 70% of that.
What most people do is they find the ARV, they look at 70% of that and then they subtract out what the repairs need to be and that allows them to know what the max they should pay for the house is.
In the 30% left, that’s your buffer. That makes up carrying costs and fees, utilities, closing costs, utilities, attorney fees, and taxes and your profit.
$250,000 – ARV
$250,000 x 70% = $175,000 (your all in number)
$175,000-$50,000 for repairs = $125,000
That would mean you need to get the house for less than $125,000 in order to bank a profit. How much lower is up to you.
It should be noted that people who use this rule are usually listing with realtors to whom they are paying 6% (3% to the buyers realtor and 3% to the sellers realtor) and they’re usually paying an additional 2-3% in closing costs so that 30% buffer allows them to pay that 8-9%.
For what it’s worth, in the current housing market in a metro area like Charlotte where we are, 70% rule is pretty hard to find. It is typically closer to 75-80%.
We also don’t use that because we automatically save 3% because Jordan can list it since he’s licensed in both North and South Carolina.
How much should you plan for incidentals? (aka. your “oh sh!t budget”)
This is going to vary, again and depend on your profit you’re looking to make.
Your 30% buffer should (and I emphasize SHOULD) cover any incidentals. It will just eat into your profit.
For instance, with Beverly, we set a framing budget of $7000.
When we crawled the crawl space, we realized there were termites and 70% of the floor joists and band sill had to be replaced.
This turned our $7000 framing budget into $24,000. Like that.
Thank goodness we had built that buffer in, but it just goes to show you that you never know what will blow that budget.
How Much Should Stuff Cost?
How do you know what’s a fair cost for flipping if you’ve never done this before? Here are our top tips for that:
- Get 3 quotes on everything (electrical, plumbing, drywall, etc)
- Find your reasonable price per square foot in your market. Here in the Greater Charlotte Metro area, we know it’s $1.50 to $2 a square foot to paint. It’s $1.50 a square foot to lay floors. This information comes from a mixture of getting quotes and having conversations.
- If you have a friend who is in the trade, ask them if the quote you got seems fair. Even if they’re in a different city/state/market, they may have input for you that will be valuable!
If you’ve made it this far, you must be serious about flipping a house and hooray!
I really hope that you’ve found this article helpful in your decision when it comes to how to flip a house with no money. Whether you’re looking to get into the house flip business or just want to have this info in your back pocket for the future, just don’t be afraid to think outside the box when it comes to financing!