A-to-Z Guide on How to Finance a House Flip

In this article, we’re going to talk about how to get money to buy and flip houses.

My name is Jack Miller, and I have been in the real estate finance and business providing fix and flip financing for real estate flips since 1989.

I have done over 7,000 loans throughout the country in all different economies. I’ve been involved as a lender and as a borrower for years, and I hope this guide provides good content which you can learn something from.

So in this article, we are going to talk about the types of loans and how you can get such loans to start flipping houses.

Let’s get into detail and discuss your options one by one.

First, I’m going to tackle some questions, but I want to sort of set the stage. I believe just about everyone can get a loan, or rather get financing: because if you can’t get a loan, you can get a partner to do it with.

Before you can flip a house with a loan, I’m going to start with the premise that you need to prepare.

You need to have an honest evaluation of yourself, your credit and income, and whether you have the experience or not. Put it down in writing and get it formulated, so you can present it to a lender.

I think it was Lincoln who was asked, “If you had an hour to chop down a tree, what would you do?” I think his answer was, “Spend 50 minutes sharpening the ax.”

That’s sort of what it is with this process. The more preparation you do in advance, the easier it will be for you and the more likely you will succeed and get what you want.

There are real estate investment software tools helping you do your math assessing fix and flip deals, including rehab costs

Finding cheap properties to fix and flip is one part of a project. You need to calculate and make sure the cost of repairs will not make a cheap home expensive.

Preparing comes in a few different areas. First, let’s talk about personal preparation.

As I mentioned earlier, have an honest evaluation of yourself, your credit, and your income.

Assess if you have adequate reserves which lenders want to see, and see whether you have the experience to do it.

Put it down on an Excel file. There you can assess if you are weak in one area and see if you can overcome it. Know your weaknesses and know your strengths.

For example, if you don’t have the credit, focus on building up good credit or partner with someone who has good credit. If you don’t have the experience but have the desire, learn and get that experience.

There are three parts to every real estate deal. There’s buying the property, managing the property, and then selling it.

Certain people I found are very strong with buying a property. Other people are stronger when dealing with contractors, and others are stronger with selling the property.

You need to be all three of those things to be successful. And I’ll tell you that getting the financing, as hard as it may seem, is the easier part. The harder part is executing your strategy to achieve success.

What traditionally happens is, you’ll start off with one method, a more expensive method, and then you’ll move to another method as you have more experience.

With fix and flip, it’s not just about the price. It’s really about the execution and the access to capital.

I caution people to not always go with the lower price deal model. You can if it’s a good deal, but focus on execution and access. That’s the key to success.

So, you need to have all three parts. If you don’t, partner up with someone who has that element that you are weak in, which will then let you learn what a lender is looking for.

Remember, lenders want their money back. So, the more credible you present yourself, the better off you are.

As I’ve mentioned, just about everyone can get a loan to fix and flip. I’m going to talk about the different types of loans, the way you can get such loans, and who can finance a house flip.

There are different types of investor loans, different types of guidelines out there, and some of them have to do with the product type.

Some of those trying to get capital to flip houses are using a hard money loan.

Everyone has a different definition of a hard money loan, but traditionally, a hard money loan can be a private loan.

I consider myself a private lender who does hard money loans. It is a bridge loan that’s harder to get, but it’s an excellent source to get funding to flip a house.

You’re usually going to get a hard money loan from an individual or a smaller company that’s not selling their loans to Wall Street.

These are lenders that sort of make up their own guidelines and have more flexibility than most traditional lenders who are selling loans in securitizations.

Here are tips on how to qualify for a hard money loan.

Another type of property flipping loan is a home equity loan. If you own a home that has a lot of equity in it, that’s going to be your cheapest way to borrow money on a fix and flip.

A home equity loan is a loan on your home. If you have equity on your home, lenders may give you $100,000 or $200,000. Since it’s a loan, you pay it back monthly.

If you have a mortgage on your property that you are going to use as a collateral, you can still take out a home equity loan as a second mortgage if you have enough equity in your property.

You can apply for a home equity loan with a traditional bank.

A HELOC is a line of credit that you only pay for if you use it. Ideally, it’s much cheaper because you’re only paying for it as you use it.

If you draw $10,000 today, you only pay for the $10,000. If it’s $20,000, you only pay for the $20,000.

Banks for real estate investors are the best place to get HELOC loans, if you qualify.

When flipping a house and thinking of using HELOC vs home equity loan, HELOC is usually cheaper.

If you can’t get a HELOC, you can then try a home equity loan. That’s a fantastic play.

Can You Flip a House with a Conventional Loan?

Usually conventional lenders will not let you do a fix and flip because they are selling loans on the secondary market.

Can I Use an SBA Loan for Flipping Houses?

An SBA loan is not a fix and flip business loan to flip houses. It’s a loan issued by the Small Business Administration, and they don’t allow for fix and flip loans.

You may run into people who say they do — they don’t.

Can You Flip a House with an FHA Loan?

FHA loans are issued for owner-occupied residential properties only. An FHA loan is a mortgage — a loan for homeowners. You can’t get a mortgage loan to flip a house.

Can I Use a Construction Loan to Flip a House?

You can get a construction loan through a bank, but it may be very detailed because banks take a long time to approve a loan.

What this means for you is that you have to measure the cost and the time you will dedicate to get one, if it’s worth it to obtain a construction loan with the bank.

You will have to take into consideration some details like how much rehab you will have to do. If it’s $400,000 or $500,000 in a rehab, a construction loan may be the appropriate vehicle.

If it’s not that much, say $100,000, it may not be worth your time and effort.

Sometimes construction loans at a bank can be expensive, but there are non-bank construction loans that you may consider as well.

If you’re considering a 203(k) loan to flip a house, getting this type of loan tends to be very time-consuming for a fix and flip.

Can You Flip Houses with a VA Loan?

If you’re leaning towards using a VA home loan to flip houses, know that the Department of Veterans Affairs, which issues this type of loan, doesn’t intend this to be used as fix and flip loans.

The VA loan is for veterans who want to buy a home to live in.

As you can see, there are different types of lenders.

There are fix and flip lenders who are selling their loans on the secondary market. These lenders tend to be cheaper than private or hard money loan interest rates and fees.

We also talked about home equity. And there are private lenders, like myself, who are sort of an in-between bag.

If you’re looking for the best way to finance a house flip, I would suggest these house flipping financing tips.

Learn the landscape of creative financing options for flipping houses out there. Go to as many lenders’ web pages (of course, credible, real lenders’ web pages) and learn their guidelines.

This way, you can get a handle of the most appropriate lending program for you.

Some of them, for example, may have great credit score guidelines or restrictions. Some of them may have reserves. Some of them may have experience.

Once you map out at least 4 to 10 different types of lenders and guidelines, you’ll get an idea of which one you want to meet.

You wouldn’t try to fit a square peg in a round hole. You would focus on the ones that are geared toward your type of deal.

You would also want to set your expectations very realistically when you apply to the lender.

First of all, have your documents in order and prepare early. Be part of the process. Don’t just send an email and expect it to happen.

The more involved you are with the process, the more likelihood of success.

When I say set realistic expectations, that means knowing what the costs are going to be and knowing the time it’s going to take you to fix it up.

Use investment property analysis software and house flipping software tools, such as Flipster or FlipperForce, to assess your expenses and time the project requires.

Don’t be naive and say it’s going to take 30 days to fix it up. The reality is, things in the construction and rehab business take two or three times as long, and two or three times the amount of money.

Especially when starting your house flipping career, make sure that you build enough cushion to avoid looking naive to the lender, and you are not naive in your expectations.

If you are naive in your performance, you’re going to be out of business very quickly.

However, be aggressive in the timeframe. When I say aggressive, I mean conservative.

If you think it’s going to cost $50,000 to do the work, add in a cushion of $10,000 or $15,000 or even $20,000. If you think you can do it in 180 days, tell the lender you will need 300 days.

Be conservative because things always cost more and take longer. And the best part is that these are the factors that you can identify. There are other things you can’t identify, so get a handle on it.

Also, know the area. If you are in LA, it’s hard to do a fix and flip in Atlanta. And I’m just using two states, two opposite ends of the country. Stay local because by being local, you’ll know the area.

If you see a deal, go to the property. Don’t just believe a realtor. Don’t just believe a seller. Don’t be naive in it. Assume everyone giving you information is giving you false information.

Everyone is motivated by their own pocket. And the reality is, everyone coming to you with the deal is making money on the deal except you. So, don’t be left holding the bag and depend on someone.

I see it all the time. People call up from one state to another state saying, “Oh, I found a great deal on the internet and I saw pictures of it, and I did this and I did that.”

But, inevitably, what happens is they see 90% of the pictures and they see 90% of the property, but the problem is those 10% they don’t see and that can only be seen with a proper investment property due diligence procedure.

Or, they see some of the comps or they speak to some of the contractors.

Finding distressed properties may seem cheap, but they often come with serious repairs, sometimes more than you anticipate.

So, I would encourage you to be an expert in the fix and flip field or in the rehab loan field, in terms of knowing your comps and contractors, and knowing whether the city is going to require permits or not.

Take the time to educate yourself. Take a house flipping course. Use a real estate investment mentor to guide you through your first steps.

All these are critical things. There are a hundred things that can go wrong, and you need everything to go right to make money, or you need to have a big enough cushion where if it doesn’t go right, you’ll still make money.

I know I sound like doom and gloom on this. I don’t mean to and I want to encourage you on this.

I’ve been able to provide a fantastic living for my family on it, but I’m just walking you through some of the pitfalls I see.

Be very cautious about it. The bottom line is, you can get the money to start flipping houses, whether you use a fix and flip, a rehab, a hard money, or private investor (which is another tool).

If you are not qualified to go to a bank, or you are not qualified to go to a fix and flip lender, a rehab lender, or a private lender, you may want to partner up with someone to have them sign on the loan, or have them fund it with equity for a piece of the deal.

Remember, don’t focus so much on the cost. Focus on the availability. That’s really what’s key.

Keep in mind that you may start off with one type of lender. You may start off with a private lender, then go to a hard money lender, then to a home equity line, then your HELOC line.

Take it one step at a time and you will be successful. Learn and be a master at your own craft and trade. Once you do that, you’ll be extremely successful.

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About the Author

Jack Miller is a private and hard money lender who has more than three decades of experience in the industry — as a lender as well as a home flipper. At the company he founded, Gelt Financial LLC, Jack is overseeing more than $1 billion as a direct lender.

Jack is the architect of a real estate investor lending program where people lend the purchase price, rehab costs, and closing costs to thousands of investors.