House flipping has become a popular real estate venture as many people buy inexpensive houses, renovate them, and then sell for more than they paid. Even though it can be a lucrative endeavor, it has considerable financial risk, particularly for new investors. If you are a beginner intending to begin this venture but do not have sufficient cash, you may wonder how to fund your first house flip. Traditional ways are great, but there are lending alternatives for first time home buyers.
The best means of getting the funds is via loans, which you can get in various ways, including:
Taking Personal Loans
One of the first methods you should consider for funding your first flip is using a personal loan. It provides an efficient and easy way of accessing high loan amounts, presenting more flexibility according to your flipping venture. You can take out an unsecured loan, where a lender issues the funds solely based on your credit history.
Your income and credit score are the elements that determine your qualification for a personal loan. The lender utilizes this information to evaluate your ability to repay the loan, influencing the loan terms. Hence, it determines the loan amount you can receive, the interest rate, and the period you get before repaying. As a result, you can get favorable terms when you have adequate income and strong credit.
Notably, you can take out several personal loans when one loan is insufficient to fund your flipping project.
Using Hard Money Loans
A hard money loan refers to money taken from a company or individual for a short time, with the borrower offering a property as collateral. This loan type places value on the property rather than on the borrower’s creditworthiness, meaning you cannot find it provided in a bank. It presents a method of raising cash quickly but has a lower LTV ratio and a higher cost. The lender profits by collecting the collateral if the borrower defaults.
Many house flippers use hard money loans because most renovation projects take a short time to suit the limited period provided by this loan option. If you have a company, you can use loans from asset-based lending to cover short-term cash-flow requirements for your flipping project.
Understanding Asset-based Lending
Asset-based lending, also called asset-based financing, is a loaning system often utilized by small to mid-sized enterprises. The borrower uses his or her liquid assets as collateral since lenders prefer liquid collateral like securities. They can quickly turn the securities into cash if a borrower defaults on the payments. This loan type differs from a hard money loan in the collateral used. Hard money loans use physical or illiquid collateral like real estate, whereas asset-based lending prefers liquid and secure assets such as receivables or inventory.
Getting Loans from Family or Friends
You can fund your house flip project by getting loans from dependable people around you, such as family and friends. If your loved ones can afford the loan you require, it provides a convenient borrowing alternative to a private or bank loan. It is best to write down your loan terms immediately after agreeing with an investing friend or relative.
Using Multiple Financing Sources
Combining several financing sources can help you find the money to buy and renovate a property. You can merge cash from an external lender, a business partner, and personal capital to find a combined funding solution for your short-term real estate project.
Turning to Your Retirement Plan
Many beginners may not have many funding sources when starting a house flip project. Therefore, taking out a loan from your 401(k) plan may provide a viable financing option. You may find it a scary prospect when you consider the risk of losing your nest egg. Nevertheless, you can make back the cash and profit if you are smart with beginning your house-flipping venture.
You can find two primary loans in your retirement plan. The first type allows you to get the classic 401(k) loan, where the Internal Revenue Service (IRS) lets you borrow up to half of your vested balance. You can also receive up to $50,000, depending on which amount is lower in comparison to your halved vested balance. The other type is a Rollover for Business Startups (ROBS) loan. Here, the IRS sanctions you to use your savings in a business startup without incurring loan interest, early withdrawal penalties, or taxes.
You can select the loan type that suits your project’s investment size and willingness to take out from your retirement savings.
Understanding the different financing options available helps you identify the most suitable method for your house-flipping project. It enables you to evaluate the common and unfamiliar funding means and find a solution that works best for your investment plans, ensuring you have a first successful house flip.