If you’re even casually following real estate trends right now, you know it’s a seller’s market. Inventory is tight and is likely to stay that way for a while. If you don’t want to sell your own home, is there any way this situation can benefit you? It’s possible, if you have the desire and funds, to “flip” homes, buy distressed properties, fix them up and resell them for a considerable profit. But what if you have the desire and no funds? Is there any way to get a loan on a house you plan to flip?
You may be surprised to learn that there are actually five different kinds of loans available to house flippers who wish to renovate and resell properties. Here, we break down the differences between them to help you figure out which, if any, are right for you.
A hard-money, or “rehab” loan is a short term loan issued by a private lender, intended solely for real estate investment. The terms are much shorter than a traditional real estate loan, with a range of 6 months to five years. They’re usually only for 60 to 75% of the property cost, which means down payments are also larger than usual. The interest rates are also higher and lenders generally charge 3 to 6 points up front. The upside of hard-money loans is that they are more accessible to people with lower credit scores, and the process has a fairly quick turnaround time. Because the home being renovated is the collateral though, these are best suited for those with some experience with the flipping process.
If the value of your current home has increased over time, you could use some of that equity to obtain a cash-out refinance. As the name makes clear, you are refinancing your primary residence and taking some of the equity in the home out as cash. To qualify for this, one must have a credit score in the mid-600s and a minimum of 30-40% equity in the home. Since it’s part of a traditional mortgage, the interest rate is better than some of the other options, but you will have to pay closing costs, and if interests rates have gone up since your initial loan, you will end up paying more interest over time.
Another option, if you have a good amount of equity built up, is a home equity line of credit, sometimes called a HELOC. Because the interest rate is fixed and fairly low, and also due to the fact that most of the interest on these loans is tax decidable, HELOCs have become popular for both home flippers and those looking to renovate their own home.
Similar to a HELOC is an investment line of credit, which is similar but specifically designed for people working with investment properties. Like a hard-money loan, these have shorter terms, the difference is that investment lines of credit allow you to borrow as you go, almost like a credit card, but with lower interest rates, typically 5-8%. Investment lines of credit favor those with high net worth, and underwriters expect to see a history of successful property investment in the past, so these are not for first-timers.
A newer source of capital for house flippers is the much buzzed about method of “crowdfunding”. This is a kind of peer-to-peer lending process in which funds are raised via individual contributions from many investors. Crowdfunding is generally associated with tech startups, but the practice is finding a new audience amongst real estate investors as well. At RealtyShares, a California real estate crowdfunding company, the money comes from over 38,000 individuals who invest in specific transactions on the site for as little as $5,000. “The biggest benefit we offer is flexibility and a national focus,” says Nav Athwal, chief executive officer. The investors on real estate crowdfunding sites are active investors, excited about seeing improvements on homes and receiving dividend checks. Usually the site will only loan out 75% of the home’s value so they can recoup their loss in the event the site is left holding the title. The difference with this method is they are more interested in the property and the potential profit than they are in the borrower’s tax returns or income. This can be helpful if your credit is not ideal, but be aware that the interest rates can be over 10%, part of what makes these sites attractive to the investors.
No matter how you finance your investment property, you will need a good closing team on your side when the time comes to seal the deal. Setco Services takes pride in being the Florida Panhandle’s #1 title company, and our friendly, courteous professional agents can assist you in every step of the process.
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