How to Finance a House Flip

Once you've made the decision to attempt a house flip, the rude world of finance intrudes to align your dreams of wealth with reality. Funding is one of the most important parts of a real estate investment of this nature. It also happens to be one of the most difficult to obtain. Read below to find clever methods of obtaining the necessary funds for a successful rehab venture.

Instructions

Difficulty: Challenging

1. Understand that the most difficult rehab to fund will be the first. This is the case for several reasons. First, you are unproven. Second, you have a lower net worth. Third, you are facing a lot of competition. Finally, real estate is a risky venture for all—even more so for the untried investor.
2. Realize that even though traditional lending is generally the first choice of investors, such lending institutions will rarely finance more than 80 percent of the appraised value--if that--of an investment property. The remainder of the necessary funds must often come from investor savings.
3. Seek partnerships. This is not as uncommon as you might believe when it comes to a house flip. Sharing the cost also means sharing the financial risk. Another benefit to a partnership is that two sets of hands can work much faster--and time is money in real estate.
4. Consider home equity loans. Most wise investors go with a very inexpensive property for the first rehab project--one that requires little more than cosmetic repairs. This allows the investor to come up with some or all of the project money by taking out a home equity loan, which will cover the down payment, costs of repairs and traditional lending for the property itself.
5. Check out private lenders. Real estate investors often find this the best course of action for their first transaction and some of the riskier subsequent transactions. Lenders are not always easy to find but can provide great service when it comes to financing a house flip.

Tips & Warnings

• Establish a good working relationship with a lender and stick with that lender. Others may get you a better interest rate at times, but in a business such as this loyalty can often pay off (remember that interest is tax deductible after all).
• Use the proceeds from the first successful house flip in order to make the down payment and cover the costs of 'improvements' on subsequent investments. When combined with traditional finance options this should be plenty to cover the costs involved in future rehab projects.
• Be careful when investing home equity funds, personal money, college funds, and retirement savings in a house flip. Real estate is not a guaranteed investment. The best option is to invest as little personal money as possible (interest payments on investment properties are tax deductible).