I think we all can agree that house flipping TV shows can be addictive. Taking a dated, ugly home and transforming it into a gleaming, modern and luxurious abode, which has buyers scrambling for their checkbooks, is an alluring proposition. This piece will cover the basics of getting started in the house flipping business.
What the house flipping shows don’t usually show you is where the money comes from to do the flips. For those of you with dreams of being like the Property Brothers, or having your own edition of Flip or Flop, these are the three main way to fund your renovation.
1. Private Money
This is the best way to get money. Private money is anyone that is not a lending institution who’s willing to make an investment in you. What it usually means is a wealthy family member or friend or someone who was introduced to you at a real estate conference. This is a person who wants to make more interest on their money than they would by sticking it in a bank or hoping their mutual funds post big gains.
How To Structure A Private Money Transaction
It’s not unusual for a private money investor to lend both the purchase price and the rehab costs and get paid at the end of the flip, when the house sells. Customary interest rates are around 12 percent which is amortized over 12 months, so that’s 1 percent a month. That means, if the house sells in 6 months, the investor receives 6 percent on his/her money. They are then free to re-invest again.
The lender’s money is usually protected by a Deed-In-Lieu of Foreclosure, which means if things go awry, he/she can take possession of the house and sell it for what they are owed (even if it has been fully rehabbed).
2. Hard Money (HM) Lender
This is how most flippers start. An HM lender has higher interest rates than a private investor. They are usually a company, with an office and a regimented way to put together their deals. Unless you are experienced in flipping. they will most likely request that you have some skin in the game. In effect, they’ll expect you putting a portion of your own money into the deal. This can range from 10 to 20 percent of the property purchase price.
In addition, like a conventional lender, they will insist on an appraisal and will have admin fees (loan origination, doc prep, etc.). They will only release funds to you as “draws” or installments once they have inspected each stage of the renovation (three draws is customary).
Be aware that you, the investor, pay for all of the incidentals (admin, appraisals, inspections, etc.). Though your interest rate may typically be anywhere from 12-20 percent (usually around 15 percent), when you factor in all the extra costs it really adds up. Also, an HM lender will usually expect monthly payments on the money they have loaned.
No one likes to go the hard money route versus a private investor, but many successful flippers start this way. The motivation of having their own money in the project, paying fees every month and having their work inspected before they receive money is a great incentive for a flipper to work hard and efficiently, honing their skills.
3. Personal Funds
This may not only mean having a generous supply of cash on hand. If you have equity in your home, you may qualify for a Home Equity Line of Credit (HELOC). You can use this credit to fund your own flip After all, why pay a private lender or an HM lender when the interest rate of a HELOC is around 4 percent and zero if you use your own savings!
Choosing the Right Contractor
There’s a tendency for some first-time flippers to want to do the work on their flips themselves. Unless you have had previous construction experience, this is generally not a good idea. Sure, some cosmetic finishing touches such as painting, tiling or installing a vinyl floor can be handled by most skill levels. As a new flipper, though, you shouldn’t be taking on anything too complex. Nothing structural. It should go without saying that you should leave the electrical and plumbing to the pros, too.
Finding a contractor is a lot easier these days than it used to be. Of course recommendations from friends go a long way but failing that, websites such as Home Advisor, Angie’s List, Thumbtack, and TaskRabbit have a lot of verified reviews. Once you have done a few flips you might feel comfortable at taking on the role of general contractor yourself and hiring out subs to do specific jobs. This could potentially save you a lot of money. But this is only a good idea on flips that need lighter, cosmetic work.
Research and Helpful Guides
Chances are, if you’re ready to start your first flip, you’ve watched hours of the gurus doing it on TV. The TV version and the real version can be very different. The main thing to watch out for is the budget. You need a handle on the costs down to the penny.
What’s the price to install a window or a new toilet? If you’re using an HM lender you would have already had your contractor fill out a work scope, detailing everything. But if you intend to use your own money or that of a private lender and you didn’t receive a detailed breakdown of the costs from your contractor, you should ask for one.
You also need to educate yourself. There are forums on BiggerPockets as well as their podcasts which are extremely informative. Also, attending a local real estate investment club is a good idea. Find out who the main players are in your area and pick their brains. Ask around about good contractors and ask to visit some of their jobs (say that you’re interested in using their services) and possibly consider teaming up on a flip. You could provide the cash and they would provide the labor and know how. Work out a fair split, put in writing, and get started.
Getting into the home flipping business may be nerve-wracking and costly, but the upside can be tremendous. Whatever you do, don’t suffer from analysis paralysis and over-think the deal into a state of immobility. Take action, talk to people, start thinking about what criteria – private money, hard money, or personal money – best suits you. Get out and start looking at houses and going to meetings so you are surrounded by like-minded individuals, not nay-sayers.
How Appliances Connection Can Help
When you have purchased your first house and are ready for lights, cabinets, appliances and even staging, get in touch with Appliances Connection like so many other successful flippers do and let us help you take your project to the finish line. We’ll take some of the stress out of flipping, firstly by offering top appliances and cabinets at unbeatable prices, delivering them to the job site at a time which suits you and installing them as well.
Furthermore, we offer our Builder Program to flippers who scale up to do multiple flips at once. Because Appliances Connection cultivated a direct relationship with virtually all major appliance manufacturers, once we receive the specs of your job, we will negotiate directly with the appliance brands to guarantee the best price that may not have been available to you otherwise.