Real estate investments are quite expensive. Not only do you need the money to purchase the property you will be flipping but you will also need money for the improvements, repairs, and renovations that need to be made along the way. Unfortunately, the real estate business is a tricky business and there aren’t very many traditional lenders that are willing to go full out in support of your real estate investment business venture.
This means you are going to have to either fund a good portion of the expenses yourself or you are going to have to find some other means of financing your house flip. First things first, the less you pay in interest equals more money you bring home. You do not want to max out your credit cards in search of profits from a house flip if it can be avoided. Merchant accounts aren’t much better but they can help you keep better track of exactly how much money you are spending on the flip and some will even give you 90 days same as cash (this is great if you can complete the process within 90 days).
It should be said that these aren’t methods that are endorsed by PRI but they are definitely possibilities when it comes to funding your house flip. The best-case scenario is that you would have the money to play with and assume no real risk in the house flipping process but very few people trying to get started in real estate investing have that luxury.
That being said, one way that is extremely risky (especially if you are nearing retirement age) is to cash out your retirement funds. This is not attractive for many reasons, not the least of which are the facts that there are hefty penalties for doing this and you are risking your retirement security. It is an option however if you are in a bind for your flip. If your flip is successful it’s water under the bridge, the money can be returned or reinvested and the profit from your flip can then help fund subsequent flips or other types of real estate investments.
If you discuss things carefully with your family and decide that you are all willing to take the risk you can also risk your home by taking out a second mortgage for the funds. Again this is not the preferred method because the assumed risk is great for the security of your family. It is very important that everyone involved be aware that flipping houses is a risky investment. Not only is it risky because you aren’t experienced but the real estate market is fickle. Your house could sit for several months requiring costly carrying costs before it sells.
Forming a partnership is another way to share the risks and help lighten the burden when it comes to flipping houses. Keep in mind that this is a stressful business venture and should be treated as a business venture. For this reason, a volatile or fledgling friendship may not be the best risk for a venture such as this. If you do choose a partnership you need to carefully discuss the type of financial and labor investment that is expected of each partner and the share of profit that each partner expects to receive as well. You should also consider carefully whether you are willing to risk the friendship for the sake of profits or would you rather go with a partnership that isn’t a close friend (most real estate investment groups have people willing to help with the financial side and assume the risk for the lion’s share of the profits).
Hard money loans: Hard money loans are short-term bridge loans, with the lender generally being individuals or companies and not banks. A hard money loan, usually taken out for a short time, is a way to raise money quickly, but at a higher cost and lower LTV ratio.
The cost of a hard money loan to the borrower is typically higher compared to financing available through banks or government lending programs, reflecting the higher risk that the lender is taking by offering the financing.