How to Get a Loan to Flip a House (2024)

If you're considering purchasing properties to fix and flip but don't have the cash, you'll need a loan to help get started. House flipping is an investment in real estate, it involves purchasing comparatively inexpensive homes that often need work, then fixing them up and selling them for more than you paid. House flipping can be lucrative but comes with significant financial risk, especially for beginners.

In 2022, the U.S. had a modest decline in the average profit margin from house flipping, an effect of a softening market on the heels of rising interest rates. As of the third quarter of 2023, mortgage rates have almost tripled from the lows in 2021, significantly increasing the cost of borrowing, which affects the prices you can sell at and how much you need to pay for your loans from flipping.

The Costs of Flipping Homes

While buying, fixing, and reselling properties can be profitable, it costs more money to flip a house than to buy one to live in. Not only do you need the money to buy the property, but you also need funds for renovations and then the property taxes, utilities, and homeowners’ insurance for the period from the moment the sale closes to the day it’s sold to someone else.

Short-term capital gains tax rates are 10% to 37%, depending on your federal income tax bracket, and will cut into any profits you earn if you flip within a year. The long-term capital gains tax rates as of 2023 are 0%, 15%, or 20% of the profit, depending on your income. These take away less of your profits but will be offset by the tax, utilities, and insurance needed to hold the real estate longer.

If you don’t have the cash to buy, getting started in house-flipping is not easy. Even if you qualify for a loan with a down payment, you’ll pay more when borrowing to finance a flip than for a primary residence. That’s because lenders see flipping as riskier: those paying for their primary home are more likely to pay than if the loan is part of an investment.

Many lenders will not work with inexperienced flippers. They will want to see that you have a successful track record of selling at least one home for a profit. Others will work with an inexperienced flipper but charge higher fees and interest.

Hard Money Loans

Hard money loans are typically secured by the property, not your creditworthiness. They are usually offered by private investors or companies as opposed to banks or other traditional financial institutions. Hard money loans are characterized by their short duration, high-interest rates, and relatively high closing costs.

The appeal of a hard money loan lies in its flexibility and speed of funding, which can be critical if you're looking to close a deal quickly. The terms are typically much shorter than traditional loans, often ranging from one to five years, and the property itself is the collateral. Lenders also tend to put up a lower percentage of the cost to buy these properties than if you were buying it as your home, all to ensure, along with the higher interest rate, that they can recoup their cost in case of a default.

The loans usually have terms of less than one year and interest rates of 12% to 18%, plus two to five points. A point equals 1% of the loan amount, so if you borrow $112,000, you would pay an additional $2,240 if two points are added to your loan. Rather than pay points at closing, as with a conventional mortgage, you may not have to pay points until you sell the home on a hard money loan—the one soft thing about this hard money.

Hard money lenders base the amount you can borrow on the home’s after-repaired value (ARV). If a house costs $80,000, but the ARV is $160,000, and you can borrow up to 70% of ARV, you can borrow $112,000. After paying the $80,000 purchase price, you’ll have $32,000 left for closing costs (though you can negotiate for the home’s seller to pay them), lender fees, rehab, carrying costs, and selling expenses. These include staging, marketing, and real estate agent commissions. If you can stick to your budget, you shouldn’t need any money out of pocket to flip the home.

The $2,240 in pointswill take up a significant chunk of that $32,000 budget, though, and if you’re paying 15% interest for six months, your total interest on $112,000 will be $8,400. After these two significant expenses, you’ll have just $21,360 for everything else—less if you had to pay closing costs. But if the home does sell for $160,000, you’re looking at a $48,000 profit, minus taxes, for six months of work, potentially without writing a single check from your bank account.

Hard Money vs. Conventional Loans

Lucas Machado, president of House Heroes, a group of real estate investors who flip houses in Florida and finance hard money loans, says hard money loans are easy in one way: the lack of red tape involved. Unlike conventional banks, lenders aren’t bound by guidelines about the quality of the real estate at the time you buy it. “Properties in poor condition don’t satisfy guidelines for traditional mortgage financing. On the other hand, hard money lenders expect to lend on houses in disrepair,” Machado says.

If the purchase and repair cost versus the resale value makes sense and the home flipper is trustworthy, a hard money lender will make the loan. “Hard money lenders decide whether to make the loan by evaluating the strength of the deal and the reliability of the home flipper,” Machado says.

In evaluating the flipper,hard money lenders aren’t usually worried by borrower qualifications such as debt-to-income ratios and credit scores. In some cases, they may want to see an applicant’s documents, such as tax returns, bank statements, and credit reports, but they generally aren’t concerned if you are borrowing the funds for the down payment. “Should the flipper default, the hard money lender can foreclose, take ownership of the house, and sell it profitably on their own,” Machado notes.

A hard money lender, like a bank, will hold the first position lien on the home until you repay the loan. Nevertheless, you’ll be the owner and hold the deed in the meantime.

Where to Look for Lenders

One place to find a hard money lender is online. For example, Lima One Capital works with new flippers and lends up to 92.5% of loan-to-cost (LTC) or up to 75% loan-to-ARV. Fees and interest rates decrease the more experience flipping you have. Lima One lends in most states, with rates and fees varying by state. Borrowers with credit scores lower than 680 can borrow slightly less and pay the highest costs. The minimum credit score is 660. Also, Lima One Capital requires a 10% down payment and offers repayment terms of up to 24 months.

Another firm, Kiavi, offers fix-and-flip loans for up to 90% of the purchase price and 100% of the renovation costs. You need to submit bank statements to show you can cover the down payment and closing costs. Other requirements include a purchase contract, a list of past fix-and-flip projects, property documentation, and the down payment.

Offline lenders, of course, are another option. Machado suggests reaching out to local real estate investment associations, local investors, and local real estate agents to find brick-and-mortar, hard money lenders.

Private Lenders

“A private lender is simply an individual with substantial capital to loan you,” says Mat Trenchard, owner and acquisitions manager with Senna House Buyers, one of the largest house-buying companies in Houston. “You would be surprised how many individuals are out there looking to loan money they have saved. They will operate much like an HML [hard money lender], except typically you can get better rates and terms.”

Trenchard says private lenders are often more open to negotiating payment terms than hard money lenders. They may even be willing to partner on the deal and take a share of the profits in exchange for not charging interest.

“The key for the inexperienced flipper is to have confidence when negotiating,” Trenchard says. “They need to network and talk to other flippers about how much they are used to paying and know they can walk away. Don’t think because you couldn’t agree with the first lender you talked to that, you won’t find the money for a deal.”

You can find private lenders at local real estate networking events. Typically, they charge 8% to 12% in interest, plus zero to two points, Trenchard says. Like a hard money lender or a bank, they will take a first-position lien on the house.

How to Vet a Private Lender

Experienced professional flippers say the best way to measure a private lender you’re considering is to speak with other flippers—you can find and meet them at real estate networking events—and ask if they have experience with certain lenders. You’ll have many questions: How quick was the turnaround? What price did they receive? How responsive was the lender? You can even ask for references and call them.

The worst-case scenario is usually that a deal falls through because the lender doesn’t provide the promised funds, and the buyer loses their earnest money deposit. Another possibility is being surprised at the settlement table by unexpected lender fees. There is also the potential for legal battles over contract terms or a lender trying to catch a borrower in default so they can foreclose on the property. These are all good reasons to check out a lender before signing anything.

“That said, remember that in this kind of transaction, the lender is trading a bunch of money in exchange for some signed sheets of paper—loan documents. That’s not a bad deal for the borrower,” Machado says.

Online Private Lenders

Technically, a private lender is a friend, family member, or another individual who doesn’t make a business out of lending money but agrees to give you financing, says Brian Davis, co-founder of SparkRental and a real estate investor.

Some companies may call themselves private lenders simply because they are privately owned. Like hard money lenders, you can also find them on the internet.

Anchor Loans, a company based in Calabasas, California, can close deals on a wide array of property types in 48 states. Terms vary by state. According to the company, flippers can borrow up to 95% of the cost of the home and will loan between $50,000 to $10 million, and loans may be approved in up to five to 10 days. A down payment of at least 10% to 20% of the acquisition cost is required. Borrowers must have a proven track record of at least three flips in the previous 12 months. Anchor Loans says it considers loans to qualified corporations and multi-member limited liability companies with fewer than five flips.

Crowdfunding

Crowdfunding relies on a group of individuals and institutions to collectively finance loans. Each lender, called an investor, supplies a small percentage of the borrower’s loan and earns interest on that money.

Traditional crowdfunding sites like Prosper aren’t geared toward buying and flipping houses. Prosper’s maximum loan amount of $50,000is intended for projects like home renovation, debt consolidation, and small-business funding. That’s where specialty crowdfunding sites for residential real estate flippers come in. Some will prefund your loan, meaning the company will quickly close your loan using its own money while it waits for investors to put up funding. Others wait for the investors to put up the funding first, which could mean a slower closing.

“Crowdfunding websites occupy a similar niche as hard money lenders,” Davis says. “They’re relatively expensive but will lend to real estate investors regardless of how many mortgages they have and focus heavily on the collateral and quality of the deal itself.”

Crowdfunding Sites

Some of thebest real estate crowdfunding sitesoffer investors opportunities for competitive returns, and some crowdfunding sites lend money to people for real estate projects.

Groundfloor offers loans in 31 states from $75,000 to $750,000 with the financing of up to 100% of loan-to-cost (depending on experience), closings in up to three weeks, no payments during the loan term, and no tax returns or bank statements required for loans under half a million. Interest rates start at 7.5%, and Groundfloor says it can roll points into closing.

Borrowers must pay at least three months of interest even if they repay the loan sooner. Typical closing costs are $1,250 plus a $250 closing fee, and Groundfloor says it charges two to four and a half points per loan. All points and fees can be rolled into the loan. Groundfloor typically does not work with inexperienced flippers.

Another option is Upright (previously Fund That Flip), which offers $50,000 or more in funding, covering up to 90% of LTC and 100% of construction costs. Repayment terms can be as long as 15 months, and loans are available in 35 states.

Crowdfunding Drawbacks

Trenchard and Machado say they don't use any real estate crowdfunding websites. Still, both suspected that the crowdfunding process for evaluating and committing to a deal might be slower than what a borrower would experience with a private or hard money lender. Once a flipper has a solid relationship with a lender, the two can close a deal in 24 hours when a great opportunity arises if all the paperwork is in order.

Unlike private lenders, crowdfunding sites also may not offer the opportunity to negotiate. They may have set parameters for each deal because they are responsible for many investors.

The Bottom Line

If you don’t have enough cash to flip a house without financial help or have the cash but want to limit your risk, there are several ways to get funding. A hard money lender, private lender, or real estate crowdfunding site can help you get underway.

“If you know the options, where to find them, and how to network, the problem lies more in finding deals than in finding the money,” Trenchard says. “It is very easy to find the money for a great deal, but it is very difficult to find great deals.”

All these options are more expensive than traditional mortgage financing for an owner-occupied home. Still, their price reflects the high risk the lender is taking. Using other people’s money not only lets you get started in the flipping business when you have little or no cash to invest.

Disclaimer: The lenders named and described in this article are presented for informational purposes only. Neither Investopedia nor the author endorses any of these companies. Borrowers should do their own research before determining if any of these lenders are a good choice for their particular financing needs.