Strange question, right?
How can you do something that costs tens of thousands of dollars…when you don’t have any money?
So here’s the thing:
Obviously you can’t rehab a house for free. It’s just not possible, right? So we need to reframe the question a bit.
“How can I rehab a house without having to use any of my own money?”
Subtle difference, but now you’re asking the right question. How are we going to get someone else to pay for our deal?
Why Use OPM
In a typical fix & flip deal for a person without oodles of cash to fund a deal completely, the investor will go get a source of funding from either a private lender or hard money lender. The funding source will have their own prerequisites to making the deal happen, but almost always results in you needing money for a down payment (unless you find a deal with us that qualifies for 100% financing).
So, let’s say you need a $20k down payment to complete your deal…why do you want to use other people’s money?
It might seem obvious…of course you want to use other people’s money to complete a deal, right?
Let’s talk why.
The first reason is clear:
If you don’t have the money to make the deal happen, then without another source of funding you’ll not be able to get a deal done.
But what might be less clear is why people WITH the money would still want to use other people’s money.
There are 3 main reasons:
Greater Cash-on-Cash Return – One way that all types of investors like to measure their ROI (return on investment) is to divide how much money they made on a deal by how much they put into the deal. If they profited $10k, and they had to put $10k into the deal, their cash-on-cash return is 100%. If you don’t use any of your own money, your return is infinite. Cool, huh?
Less Risk – You’re putting less skin in the game if your own money isn’t on the line.
Don’t Tie Up Funds – If you have $50k total to invest across the board, the less you use in your fix & flip deal means more funds you have for other investment opportunities. If you only have $10k to invest, and you use it all on your deal, what happens if an investor buddy of yours comes along with a killer opportunity but you have no money left?
What is a Rehab Project?
A fix & flipper is a type of real estate investor that makes their money by buying discounted properties, rehabbing them, and then selling them at a higher price.
Rehab projects vary greatly in scope. While I recommend that pretty much all fix & flippers should renovate kitchens, rehab bathrooms, and paint the walls, the rest depends on the condition of the property.
Sometimes all the flooring needs to be redone, other times all the walls need to be ripped out and all major appliances changed. In those cases, the resell value can be increased tremendously (to sometimes double the purchase price, or more) because the change in the house is so drastic.
How Can I Rehab My Fix & Flip Without Using My Money?
100% Hard Money Loan
First, a hard money lender is a company that lends money specifically to fix & flippers. While an individual private lender can set whatever terms they want and you can negotiate, a hard money lender has their own set terms, much like if you were to go to a traditional bank and take out a mortgage.
Most hard money lenders will require 10% or more down (often $30k or more to complete the project), but some hard money lenders have 100% financing programs that allow you to potentially close deals with $0 cash-to-close…yes, this is the holy grail. These types of deals are hard to find, but are obviously very profitable.
Here’s an example of what a 100% financing loan looks like:
At Do Hard Money, we lend up to 70% of the after repair value, or ARV. Since we don’t require a minimum down payment, this means that if all your costs fit under that 70% number, then you can close a deal without bringing any cash to the closing table.
Let’s say you’ve got a property that looks like a good fix & flip candidate.
You’ve done your research and pulled all your comps. You believe that you can resell it after fixing it up for $300k.
You buy it for $170,000.
Rehab is going to cost you $30,000.
All your other loan fees cost you $10,000.
Total costs = $210,000
And that keeps you at the magical 70% number, and likely to receive lots of profit with very little cost.
What if You Can’t Get 100% Financing?
So this is a big question…
You jump into real estate investing…
But you don’t have much money for cash-to-close. You’re obsessed with finding those 100% financing deals.
And that’s great! Those are the types of deals you should look for. Even if you’re working with a hard money lender that doesn’t offer 100% financing, finding deals with the lowest cash-to-close and the most profit is always going to be your main goal.
But what if you find a great deal, you crunch all the numbers and you’re sure you’ll profit $40,000, but…you’re $5k short of making the deal happen.
Do you walk away?
NO! DON’T DO IT!
Too many people get obsessed with this idea that they have to only work with deals that qualify for 100% financing. That’s just not the case.
Most deals look like this:
You need to borrow $220,000 for your deal, but you have $210,000. If you don’t have the $10,000, then you use other sources of financing. Sometimes it’s with your own cash, other times it’s not.
In order to do your rehab without spending money, you’re going to look to these sources I’m about to cover.
Home Equity Line of Credit
This one is first because it’s the easiest, if you can access it. A home equity line of credit means you’re borrowing against the equity that you have in your house. Remember, equity is the difference between what you owe and what your property is worth. If you owe $200k and your property is worth $400k, you’ve got $200k in equity.
Because it’s backed by a property with value, you can get access to a good amount of money at great rates!
Then, you can use the HELOC as a pay-as-you-go when it comes to rehab or other costs, or it can be used for a big chunk that you owe upon closing.
Now here’s the beauty of this thing. So of course you have to pay interest on any money you owe, right? And your deal is going to take months to complete…so payments on that credit you took out will be required.
You can make payments by taking out MORE from your HELOC! This sounds like a slippery slope strategy, but when your deal is done, you take your profit and pay back every cent you owe on the HELOC and you walk away clean. Nice, huh?
Credit Card Advance
So here’s a fun one, and one you probably haven’t considered…likely because it’s sounds shady or like something that will end with you bankrupt!
But it’s not that at all. In fact, it’s a well established industry that can get you 0% interest money for just an origination fee.
Here’s how it works:
You know those credit card offers you get in the mail that offer you 0% interest on any new purchases for 6 months? That’s what this is.
In fact, you could just take one of those credit cards and start using it for your rehab project! However, many of the closing costs can’t be paid with a credit card, so you need a service to give you a cash advance on that credit card.
You’ll have to pay a little up front in origination, but then you’ll get access at 0% interest for anywhere from 6-24 months.
Once you’ve flipped your property, take the profit and pay off your credit card advance! It’s definitely an underground strategy, but works super well.
So these next three I’ll cover are pretty common ways to work deals and complete rehab without any money. They’re all about how to work with a partner!
A partner is someone who’s going to provide you the cash in order to make the deal happen. They can also use their credit to go get a line of credit or another funding source.
Either way, they’re the money, and you’re the one doing the hard work.
There are multiple ways to structure how to pay back that debt, and one of them is that your partner is basically going to loan you the money, and you pay it back with interest.
The terms are set in advance…say 10% along with perhaps an origination fee. Then you determine whether you’ll be paying back the interest monthly or all at once after the house has been flipped.
Then the real question…how do you find a partner?
Often the first deal you find will come as the result of someone you’re working with. Someone who you’ve talked to about your interest in real estate investing and they say something like “I’ve always wanted to get into that.” And then you say “I’m looking for someone to help fund a deal, if you’re interested.” Then you’re off and running.
It’s also very common for investors to find a family member or friend to fund the deal. I call it “love money.” Call everyone who loves you and see who’s willing to help fund a deal.
And last, just networking. Finding places where other real estate investors hang out, either online (Facebook, LinkedIn, Bigger Pockets, etc.) or in person (real estate investing groups) and start getting to know some people.
You’ll be surprised at how many people are looking for a better way to invest their money, but aren’t willing to do the hard work of a fix & flip.
Instead of having someone loan you the money with a set return, you’re going to be closer to true partners. You’re going to decide upon a predetermined percentage of the profit that you split.
So you get $30,000 profit, and you have to pay your partner back $10,000. Then the two of you split the remaining $20,000.
Usually these types of partnerships aren’t long-lasting. They’re for a deal or two. After you’ve pocketed some money, it may make more sense for you to pay for your cash-to-close out of pocket or find a cheaper source of money (like a line of credit). You likely don’t want to split the profit forever.
Formal Business Partner
This is the type of partnership where you’re planning to work together on a lot of deals. You’re going to form an LLC together, and set up all the details well in advance.
However, like I said in the last section, it’s probably not advantageous to you to do all the work and only pocket half the money, especially after you’ve done a few deals and have the money yourself.
In this case, you could split the money differently, say 70/30. Or, this person could be more of a true partner. They’ll continue to fund the deals and you’ll continue to split 50/50, but perhaps they take a more active role in finding & negotiating deals along with you.
This is a bit more advanced, and requires a more open-minded seller.
In this scenario, you’re going to work with the actual seller of the house to lend you money!
Let’s say you’re $10k short of making the deal work…
Instead of the seller lower his asking price by $10k, he could instead loan you the money. At that point, now you pay it back as if he were a debt or equity partner!
Now why would a seller do this?
He might jump at the opportunity for an investment opportunity…a way to turn his $10k into $15k or whatever the case may be
Wants to sell his house faster. Since you’re already there, having made an offer, done inspections, and ready to move forward, he may want to help facilitate the deal.
Why wouldn’t a seller want to do this?
One problem you’ll run into is that most sellers won’t have the money to do this. In fact, they’re usually in this situation because they don’t have money. It also requires a seller who is a little more entrepreneurial minded. Even someone with the money may think it’s too much of a hassle and wants to move on. Or perhaps they don’t trust you to profit on the deal.
If you can make this work, it’s one of my favorite ways to run a deal because it puts more money back in the seller’s pocket.
Line of Credit
This refers to an unsecured line of credit, one that’s not backed by your house (like the HELOC mentioned before).
You’ll likely need a higher credit score and they’ll be a bit more expensive, but it can be the difference between getting your deal done and having to walk away.
Borrow From Your 401(k)
These next two are fascinating to me and becoming more popular ways to fund deals! If you have a 401(k) or an IRA, you have some options to make a deal happen.
Did you know that you can borrow your retirement account? Of course there are certainly some rules and stipulations in order to make this happen.
The law is that you can borrow 50% of the value of your 401(k), or up to $50,000. In the scenario that I’ve been talking about where you’re just looking to pay the cash-to-close, that’s usually more than enough to cover that.
You are then required to pay back the loan on an amortization schedule over no more than five years. You’ll also pay interest.
But think about this…
Who does the interest go to? Yourself!
Also, there are no prepayment penalties. So when you need to fund your rehab project, and then you flip your deal after 6 months or so, you can just pay back everything you borrowed and you’re good.
Some finance pros think this is a bad idea—that you’re shortchanging your future potentially because the money you take out will stop earning interest.
However in our case, you’re only going to be taking out the money for 6 months or less. That can cost you some money, but if you’ve got any decent profit coming your way, that loss is minimal.
I like to say this:
Don’t worry about how much it costs, worry about how much you’re going to make. The cost of taking out the money might be a few hundred or few thousand bucks in lost interest (depending on the size of your loan), but the gain could be $30k+. Our average borrowers profit $33,572 per paid off loan.
Self-Directed Retirement Accounts
Alright, I’ve saved perhaps my favorite here for the end! It’s another one that goes along with your retirement account.
But first, we’re going to need to define a few of the retirement account terms.
401(k) – Company-sponsored retirement account where the money is automatically removed from your paycheck. Your employer picks a company to work with, and often offers a matching incentive. For example, they may match 100% of the 3% of your paycheck, and then 50% of an additional 2% of your paycheck.
IRA – Individual retirement accounts that you open yourself.
Traditional – This can apply to either a 401(k) or an IRA, and it means that you’re contributing pre-tax dollars. In other words, there is no tax taken out of this money until it’s withdrawn, likely many years from now.
Roth – This is either a 401(k) or an IRA, but the money is contributed post taxes. In other words, your employer pays the taxes on the money, and then puts it into your 401(k), or you take the taxed money from your paycheck and put it into an IRA. Any gains in your Roth account will then never be taxed, not even when you withdraw, because it’s already been taxed. Many younger people prefer Roth accounts because the money can grow for many years tax free. You can also withdraw any contributions that you made at any time, but not the gains, because you put in the money tax free.
Self-Directed – These are retirement accounts where YOU decide how the money gets invested. In a regular, standard account, there’s a person in charge of a whole bunch of accounts, and puts that money into a standard set of stocks, bonds, or other traditional investments. When you self-direct, you get to decide how that money is invested…which opens up alternative investments, such as precious metals, cryptocurrency, or…real estate!
Alright…this is getting fun.
I believe this to be one of the greatest wealth-building tools imaginable…and many people don’t even know it exists.
So right now, you should go set up a self-directed Roth 401(k) or IRA, depending if you work for an employer who offers a retirement account.
Then let’s say a deal comes along that looks super enticing. You run the numbers, and you estimate you can profit $40k at the end of it.
But you need $10k to make the deal happen.
So, you go to your self-directed Roth retirement account and you take the $10k out. Then when you sell the deal and profit your $40k, that goes right back into your account…and IT WILL NEVER BE TAXED.
I’m serious when I say it’s an incredible wealth-building tool. You don’t report it, it’s not income…it’s just a huge boost to your retirement account. I can’t believe this isn’t talked about more.
And like I said above, you can take out any contributions you make at any time. So that $40k has to stay in there (unless you want to pay the 10% fee), but since it’s grown so fast, you can take out some of the money you contributed without feeling like you’re robbing yourself. Essentially, you can treat it like a savings account where your money grows really, really, really fast!
And let’s give you a bonus one here, just for fun, okay? It’s a bonus because there actually isn’t a rehab involved in wholesale deals, but you can flip without having any money!
So if you’re unfamiliar, wholesaling is when you go out and find a deal. You run all the numbers and confirm that there’s profit to be had in the deal. Then, you negotiate with the seller and put the property under contract.
Now at this point, you’re not actually going to go through with closing on the property—you’re going to assign the deal to another real estate investor who pays you a finder’s fee! Pretty neat, huh?
You can make $2,500 – $10,000 on a regular basis, but I’ve also seen $25k or more as well.
These deals are popular because:
- No loan is required
- They’re fast
- There are no deadlines
- There is no rehab
- There is no contractor
- You can still make decent money
- There are MUCH fewer headaches!
In fact, a lot of fix & flippers, even if they do have the money, will wholesale a deal here or there if they’re too busy with a current deal they’re working on.
They’re also popular with brand new fix & flippers because they’re less complicated and you can get some seed money to do a true fix & flip…or you can follow the tips in this post so far to not have to bring any money to the table!
So there you have it…my best strategies for completing real estate projects, including the rehab, without using any of your own money!
I highly recommend learning all of these strategies.
You’re going to be a little like Batman…
You have your utility belt with all sorts of tools on it, and then you pull out the right tool based on the deal!
Your friend brought you a deal because he heard you’re an investor? Great, partner up with him.
Your home’s value has gone up recently? Sweet, maybe that HELOC makes more sense.
You’re wanting a big boost to your self-directed Roth 401(k)? Use the money in that account to fund your next deal!
The point is, fix & flippers who do this for a living—even if they have money at their disposal—often don’t use their money for the rehab or loan costs because they don’t want to tie up their money. Honestly, who would?
They become masters at using the strategies I’ve talked about in this post. Another way to look at is that you can use these strategies to flip deals without ever running out of money!
No matter your financial situation, you can always flip a deal.
Good luck and happy hunting!