Home flipping — also known as wholesale real estate investing — has become a hugely popular wealth-building option for investors. The practice involves purchasing older properties and refurbishing them for resale to realize a large profit. Depending on how popular a market is, the entire process can be completed within a few months. Many investors have used home-flipping to build wealth quickly.
But securing financing to purchase those properties can be difficult for new investors who have yet to build a large investment pool. Without the option to self-fund, they have the same financing requirements as non-investors and may not qualify. Here are five options that under-funded investors can pursue to secure their first investment purchase.
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1. Traditional Financing
Obtaining a conventional mortgage is the standard method for purchasing homes. Conventional mortgages are backed by large, established lenders, like banks and credit unions. They offer longer terms and lower monthly payments than other options, making them a popular choice for consumers with good credit and long employment histories. Terms run from ten to thirty years and can be paid off early, depending on providers.
But conventional financiers operate under strict government regulations that require large down payments (typically 20% minimum), high credit ratings, and debt-to-income ratios lower than 50%. For unestablished investors looking to build their company, those restrictions can be difficult to overcome.
2. Investor Financiers
Investor financiers — also known as hard money lenders — are private citizens or investment companies that are not held to the same regulations as traditional banks and credit unions. Thus, the barrier to entry is lower, and the loan is approved faster. They award these loans based on the value of the collateral. For house flippers, this means the property to be renovated. Because the investor intends to renovate the home quickly and sell it, they usually pay the loans back within a year.
In ultra-competitive housing markets, such as Los Angeles, there are many investors competing to purchase properties as soon as they hit the market. Because of that, Los Angeles hard money lenders are available to secure a loan and purchase a property quickly. Hard money loans can separate an under-funded investor from one with cash in hand, ready to purchase.
Hard money loans normally have higher interest rates and lower LTV (loan-to-value) ratios than conventional mortgages. So, these are not ideal for homebuyers looking for primary residences. But because home flippers pay off the loans quickly, those drawbacks are less important. The speed and ease of the loans trump all else.
3. Government Issued Loans
Several departments of the United States government offer home loans, such as the VA, FHA, and USDA. These loans operate under different regulations for homebuyers than conventional mortgages. Thus, these loans can be easier to obtain for qualified homebuyers. However, most government loans are intended solely for primary residences and are not intended for investors. But the Department of Veterans Affairs — the VA — allows one specific opportunity for a growth-minded new investor.
First, a veteran must be financially secure, with a minimum 620 credit rating and a stable employment history, similar to conventional loan seekers. But because the loan is federally backed, there is no need for a down payment. Also, the veteran must have served at least 24 continuous months on active duty in the military.
If a veteran qualifies and commits to living in one unit as their primary residence for at least twelve months, he or she may purchase a multi-unit complex — such as connected townhouses — using a VA loan to finance their investment. The property must also meet a specific set of requirements for the VA to grant the loan.
4. Retirement Savings Loans
Many retirement plans allow their owners to borrow from their own savings. These plans are the 401k, 401b, and some pensions. The money is set aside from the investment fund to serve as collateral until the loan is repaid. The loans usually run for five years but can be extended to fifteen for homebuyers. But all money set aside loses out on any market appreciation that it could have earned during that time.
Investors can borrow against an IRA in one specific sense. It’s not really a loan, so much as a loophole in the regulations that a savvy investor can exploit to secure financing. The government allows IRA owners to withdraw funds from an IRA without penalty using the Sixty-Day Rollover rule. If they pay the money back into the account within sixty days, there is no penalty. If not, the money is hit with the standard 10% deduction for people under 59-1/2 years old and must be paid back.
5. Crowdfunded Financing
Crowdfunding is an exciting option made possible by social media and networking. Popular sites such as GoFundMe and KickStarter allow people to search for investors for a wide variety of projects. They create a project page and share it with family and friends. They can even advertise the page using Google Ads to draw even more attention. By using crowdfunding, a home flipper can reach tens of thousands of potential investors in their project. Novelist Brandon Sanderson generated over $3 million dollars on KickStarter to fund a trilogy of books without resorting to traditional publishing.
But more crowdfunding sites exist that focus on funding homebuyers, such as HomeFundIt, FeatherTheNest, and PatchLending. The first two allow an investor to create a project page and share it similarly to GoFundMe and KickStarter. The money is transferred directly to the investor to use as needed, with almost no regulations attached. However, HomeFundIt and FeatherTheNest focus on delivering help for first-time homebuyers who are looking for primary residences. PatchLending is built specifically with home investors in mind by crowdfunding other investors. This service is not without its own regulations, however, that the home buyer must meet, such as higher interest rates than conventional mortgages and a minimum credit rating of 650.
New home flippers who lack the money to self-fund their own investments have more options than ever to obtain financing. Whether it’s through traditional financiers, hard money lenders, or crowdfunding.
