We’ve all watched a house flipping show or two and considered diving into flipping homes ourselves.
It seems like an awesome way to make some extra income or even create a full-time income. I’ve always wondered about how to go about financing house flipping.
However, as easy as those house flipping shows make it seem, flipping houses is risky. It requires huge investments and obtaining financing can be challenging.
In this post, I will share what I’ve learned about the true costs of flipping homes.
The Financial Risks That Comes with Flipping Homes
When you watch the house flipping shows on television, it is rare that they will actually show a home that has lost money.
However, the truth is that flipping houses is very risky. Most home flips do not have a huge ROI.
Most beginners may think only of the cost to buy a fixer-upper and the profit that can be made.
For example, buying a fixer-upper for $300,000 and selling it for $380,000 would yield a profit of $80,000.
The questions that you’ll need to ask yourself is how much will it cost to maintain your flip until it is sold?
It could take months before you and your Realtor® find a buyer. Each month the home hasn’t sold, carrying costs add up.
What are carrying costs? They can include:
- Property taxes
- Utility costs
- Staging costs (furnishing the home)
The average time it takes to sell a home is about 6 months (1). When the house is sold, there are also costs associated with it to include:
- Marketing costs
- Closing costs
- Real estate agent commissions
If you have gone over budget in home repairs, that eats into your potential profit. The truth of the matter is that even the most experienced home flippers often break even or lose money on some of their flips.
Financing House Flipping – The Truth About Using Other People’s Money
You will come across a lot of articles and advertisements in which you are able to finance your house flip using other people’s money.
It sounds great, right? No money down! Well, while getting started without using any of your own money is possible, it isn’t necessarily easy.
Partner Flips – Pros and Cons
Flipping with a partner typically involves financing from a family member or friend. What often happens is your investor puts up the money to buy your property. You can then rehab it to prepare it for selling.
The benefit to this is that you likely will not have to worry about paying interest the way you do with a loan.
The “downside” if you want to call it that is that there is usually a 50/50 split on the sale of the home.
That means if your profit from selling your flip is $30,000, you will only make $15,000. Keep in mind that you will have done all of the work to rehab the home.
Yet, flipping your home wouldn’t be possible without your partner putting up the cash. If you can find a partner willing to invest for a 50/50 split, it isn’t a bad way to get started as a house flipper.
Bank Financing for Financing House Flipping
Obtaining financing from a bank is probably one of the most difficult ways to finance your flip.
This is because you generally need to have good credit and have a good track record already established with flipping houses.
Often times you’ll also need to put some of your own money in as a down payment. Depending on your area and the bank you are dealing with, you could expect to put in between $20,000 and $30,000+ of your own money.
Coming up with a down payment is difficult for most people and those who actually have saved up that much may find it extremely difficult to let go of.
Private Lenders for Flipping Houses
You could find a private lender who is experienced in investing their money with house flippers. This person is usually a friend, family member, or business acquaintance.
Their terms and conditions vary and you can expect to pay interest on their loans. The great benefit to this is that the interest rate can be a lot lower than bank financing.
You’ll also get to keep more of the profit when your home sells. The challenging part with a private lender is finding one!
It can be really difficult when you are new to flipping homes. However, with persistence, you may find a private lender with great terms.
House Flipping for Beginners – Financing Your Own Flips
Using your own money is the ideal way to begin flipping homes. You increase your profit potential and have less worry about paying high-interest rates on private lender and/or bank loans.
Saving up money for a down payment is difficult for many people. If you are willing to earn some extra money via a second job or another creative way to earn extra income, you can do it.
Most of us hold down full-time jobs. That makes it difficult to take on a second job without burning yourself out.
One way to finance your first home flip is to create your own virtual real estate portfolio.
You can accomplish this by creating a niche website and earning income from it.
That is exactly what I am doing to work my way out of a 9 to 5. It takes time, effort, and patience but the rewards are huge.
How to Get Started with Your Online Business
Just as you have to educate yourself about flipping homes, you must educate yourself on how best to create an online business.
A niche website is simply a website focused on one topic that you are passionate about. You could start a website about flipping houses.
What you learn and share on your website will attract other visitors who have the same interest.
You can place advertisements on your website as well as specific products and/or services that you use and earn commissions when visitors buy them through your links.
This process of online business is called affiliate marketing.
I learned what I know from a lot of online research. However, I didn’t know how to create an actual business.
Fortunately, I found Wealthy Affiliate’s online business training course and it changed everything for me.
They are an all-in-one service. They provide your first free website, web hosting, and training.
An online business can provide the financial means to buy your first fixer-upper. You’re already willing to work hard for your dreams.
Why not create a new stream of income that can help you reach your dreams faster? Read my Wealthy Affiliate FAQ page to learn more.
Have you already begun your journey into flipping homes? Share your experience in the comments section below!