How to Finance Your Fix-and-Flip Dream
Fix and flip homes are properties that are purchased, renovated then sold. Typically, the homes that are bought are older, outdated and in need of a lot of work to be done to be modern and more livable. Often, individuals will purchase these homes at a lower price with the goal of renovating them then selling them at a much higher price, therefore making a sizeable profit. Fix and flip homes can be good investments, but they need to be financed first. There are many options for financing fix-and-flip homes, which will be outlined below.
When calculating finances needed to purchase fix and flip homes, there are more costs than with typical turnkey homes. Typical properties require a down payment of 20% to 45% of the total cost of the home as well as insurance payments or homeowner’s association fees. Additional costs for fix-and-flip homes include materials and labor needed for the renovation and the realtor and closing fees once the home is sold again. Fix-and-flip homes are often owned for much shorter amounts of time as compared to other homes, which may be lived in for ten to fifteen years.
Friends and family members can provide individuals with the cash needed to buy or make a down payment on an older property. In turn, they may expect to receive some of the profits after the property is sold. For example, if they contribute 50% of the cost of the home at the lower price, they may receive 50% of the profits once the updated property is sold.
If individuals already own a home and are looking to buy a second property to finance, they may take out a home equity line of credit on their current home. This is possible if they have 20% equity in their current property.
Another option for financing fix and flip homes is using retirement savings money, such as money that is in someone’s 401k. If they have enough money in these accounts already, they can take out part of it to buy a new property.
For people who are not looking to borrow a lot of money, and have good credit, personal loans are options as well. This may be for individuals who have just sold another fix-and-flip home and are looking to purchase another. Individuals who do not have good credit but are still looking to purchase a property may use hard money loans, which are funded by private investors instead of traditional lenders.