How To Finance a House Flip (5 Popular Options)

Finding deals trips up a lot of people, but even more frustrating is having one ready to go…with no financing for it. Here’s how to go about getting it.

So now you’re ready to buy that old, unloved house and turn it into one of the hottest properties on the market. You’ve got your list of repair estimates, the amounts you’ll need for down payments and purchase price, and even know how much you’ll need to earn in income to keep your family afloat.

Now how are you going to pay for all of it? 

You’d be surprised how many investors look like a deer in headlights when they face that question. Suddenly, the reality of their situation comes to light where they realize they don’t actually have a plan for how to finance their fix & flip. But that’s where I can help! I’ve broken down all the little costs you’ll need to think about first so that you know exactly how much money you’ll need, plus the most popular ways to get financing. I’ve also got a few tips for how you can nail each method and get that money quickly. Let’s dive in. 

What Costs Should I Expect to Pay for When Flipping a House?

Like any business, real estate investing has the costs you’d expect to see, plus hidden fees that aren’t considered until later. Too many investors end up in the red because they only think about the costs directly related to each fix & flip when it just doesn’t need to be that way. This list might seem like overkill but believe me; it’s better you come out pleasantly surprised than scrambling for last-minute cash to keep your business afloat. 

There are three main categories of costs you’ll need to consider for every investment property:

Cost of Goods

Cost of Goods Sold (COGS) is just jargon for the direct costs of your inventory (the properties you buy). Your COGS should include:

  • The purchase price
  • Closing costs
  • Taxes
  • Brokerage/Agent fees
  • Mortgage and/or loan payments
  • Repairs and service fees
  • Materials (if not part of the repair cost)
  • Marketing the property (“for sale” signs, the cost of your time for showing the property, listing fees, etc.)

Carrying Costs

Your carrying costs are the things you’ll pay for while you maintain possession of the fix & flip. The sooner you’re able to sell off the property, the lower your carrying costs will be. Expect to pay for:

  • Utilities, both startup/”turn on” deposits and ongoing usage. You might feel like keeping the water running or the lights on isn’t a requirement, but you’ll need those utilities while your contractors are doing repairs. Also, the costs to fix a frozen pipe are way more than what you’d pay for half a year’s worth of water. 
  • Homeowners insurance
  • Homeowner’s Association (HOA) fees
  • Lawn care/landscaping
  • Loan interest
  • Property taxes

Business Overhead

Your business costs will be the “soft” fees you pay to keep your business running that come from the revenue your business earns. It’s up to you and your accountant how you want to divvy up your overhead costs across each property. Still, the easiest way is usually to add up all your overhead costs and divide that number across how many properties you’ll invest in every year. So if you’re planning to do ten fix & flips this year, 10% of your overhead will be figured into every property. 

  • Depreciation
  • Amortization
  • Marketing (General)
  • Business licensing and fees
  • Liability insurance
  • Taxes
  • Office space
  • Office supplies
  • Staff
  • Professionals (attorneys, accountants, etc.)
  • Office utilities
  • Gas
  • Mileage
  • Your salary (always pay yourself!)

Five Popular Options for Fix & Flip Financing

Hopefully, your head isn’t spinning yet with all the costs you’ll need to consider. If you’re still here, great! Now let’s figure out how you’re going to pay for all of this. 

Most investors will use a mix of these financing options, so don’t worry if none of these feel like the perfect solution. Here are the most popular methods investors will use to finance their fix & flips. 

Your Savings

Using your own money comes with the least complicated financing possible, but it carries a lot of risks. Most experts, myself included, wouldn’t recommend blowing your entire life savings or retirement nest egg on a real estate purchase as the market is just too volatile to ensure you’ll make it back, particularly if you’re new to this. Still, using your savings for things like emergency cash, a down payment, or a few service fees isn’t the end of the world. 

What you’ll need: Bank statements showing at least six months of steady account balances, especially if you’re buying a HUD property with cash. You may have hit the lottery and want to blow it all on a new house, but the people (or government agency) you’re buying the property from want to ensure the money will still be there when it’s time to wire transfer it over to them. 

Private Lenders

If you are fresh in the flipping business, a private lender may be of great assistance because their terms are usually pretty lenient. Your private lender can be a friend, relative, or colleague. Most private lenders probably won’t expect monthly payments on the loan, just an accrued interest once you make the sale. This is a less risky way to make money through flips without ever touching your money. However, you will need to find properties in seller markets (lower supply, higher demand) so that you can flip as quickly as possible since private lenders tend to get impatient if it seems like things are taking longer than you pitched them. 

What you’ll need: Even if it’s your mother or best friend, you need a contract. Not only will the contract protect the two of you, but if you’re running a business, then you need to act the part. Private lending is a business transaction, so you need to have a paper trail. Your contract should include payment terms, interest rates, what should happen if you default, and other pertinent details. Writing all this out might feel uncomfortable since you’re dealing with someone you love. Still, it’s better to be uncomfortable now than ruin the relationship over a miscommunication or bad assumption. 

Partnerships

Partnerships are similar to private lenders, except you’re most likely giving them a partial stake in the business and the profits in exchange for their investment. This is great if you want to have someone else share in the risk, but it does mean you’ll make less money and might lose some of the final decision-making power if something goes wrong. Also, if your new partner is someone you have a personal relationship with. In that case, suppose you need to consider if it’s worth risking the relationship since many partnerships get stressful at one time or another. 

What you’ll need: A business proposal and contract stating how much of a stake your partner is buying in the property. Also, are they becoming a long-term partner or just coming on to invest in this one property? What’s the exit strategy for either or both of you should this deal fizzle out? 

Traditional Banks

If you want to avoid getting anyone else involved in your business, then traditional banks are usually the best place to go since they’re used to dealing with business loans like yours and have a standardized process. However, you’ll have a ton of hoops to jump through to get your loan approved, so this is not a process designed for the poorly-organized investor. 

A few tips: 

  • Start with a local credit union before heading to a big bank since they’ll have more interest in projects that revitalize their community. You’ll probably need to be a member first before they approve your loan or line of credit, so start making that connection as soon as you can. The longer of a relationship you have with any bank, the more likely you are to get approved with competitive rates.

  • Also, take the time to get your credit in shape before applying for your loan. Hard pulls only account for 10% of your total credit score, so your application won’t do much damage to your credit report. Still, the lower the score, the worse multiple hard pulls will look and the higher interest rates you’ll receive. Pay off your debt and get your accounts in good standing at least two months before applying. That way, you’ll ensure your creditors have had enough time to update your account status with the reporting bureaus. 

What you’ll need: Traditional banks and credit unions don’t play around when it comes to lending large sums of money, so you’re going to need to be as attractive a candidate as possible. Expect to have a good credit score of 700+, proof of longstanding employment (to verify you can make your payments), and probably a business proposal and a list of references. You’ll want to overdeliver and give as much information as possible, especially if this is your first business loan. You also should expect to put something up as collateral if you’re asking for a substantial amount of money. 

Hard Money Lenders

Last, and certainly not least, is the hard money lender. Hard money loans were explicitly created for real estate investing, so your lender will have a unique understanding of what you’re trying to achieve with that old fixer-upper. The best hard money lenders also have resources for their clients that ensure their deal is as successful as possible. We, for example, get every clients’ scope of work reviewed by a licensed contractor consultant who makes sure no blind spots are missed and that the investor is getting a good deal for every estimate.

Hard money is excellent for gap financing when you need help getting those repairs done. Since there’s rarely any credit or employment check, hard money loans are perfect for those with a few financial mistakes in their past or felony records. 

However, you need to know that hard money loans have higher interest than a mortgage, require payment in full typically within 3-5 years, and use your property as collateral by taking a first position on the title. If you default, the lender gets the house, and you’ll be left with nothing.

What you’ll need: Hard money lenders rarely care about your credit score or what reads on your bank account. To them, what matters most is what you sign up as security while applying for the loan such that in case you default, they will sell it and recover their investment. You’ll also need a detailed Scope of Work showing the ARV and an itemized list of repairs, plus a list of your licensed repair or service professionals. Most hard money lenders won’t accept a proposal that lists you as the contractor unless you too are licensed and bonded. While we’re all sure you could fix that drywall without any issues, it’s just better to have someone else do it that’s liable should something go wrong. 

Final Thoughts

There’s a lot to consider when figuring out where you’ll get your fix & flip financing, but it doesn’t need to get overwhelming. The best way to ensure you’ll have enough is to lay out every cost, create a budget, and use the mix of financing options that best fit your situation. The more you do this, the easier it’ll get, I promise. 

Did I miss any costs you think new investors should know about? Leave a comment and let me know!