Author Topic: Best Strategy / Advice on How to Finance a Flip  (Read 1353 times)

pstu24

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Best Strategy / Advice on How to Finance a Flip
« on: December 28, 2016, 11:06:19 AM »
I am looking for advice on how to finance a flip.

I know right off of the bat how "risky" a flip can be. I also know that there are always questions regarding the unknowns. Furthermore, I know there are reasons that banks set their rates and lending standards the way that they do. But, I do not think I will qualify for traditional financing, even though I believe in an objective world I am a very low risk borrower.

As per my credit history (I am 29 and have had a credit card since 16), I have had a total of ZERO late payments in my life for primary residence, car loans, student loans and CC payments. I am also an individual with a credit score that is right about 800 (plus or minus a few points depending on which institution you use). I have no bankruptcies, and no significant risk that I can see. My problem is that my current debt to income ratio is just too high to qualify for a traditional loan to flip a house and get started.. so I am trying to be creative.

I'm also sure some of you will say I should stick to their standards, however, as Mustachians I think many would agree that these rates are for 'average' citizens. Why can my current debts only be a certain percentage of my income? It's not like I go out and blow the rest of it on entertainment, lifestyle, and countless other things. The MAJORITY of my income goes towards debt repayment and savings. That is why I am trying to do this anyway... so that I can bring in a decent amount of income in the short - medium run and then turn around and use that money to pay off my student loans.

Here's the only few options I have so far ... and I would love to hear any comments OR any ideas as well for where to look!

Because I am looking to purchase a flip in a small city is anywhere from 100k to 120k based upon a few resources. However, the city portion significantly pulls that down. If you look at the homes in the top 3 county school districts, the average home price quickly climbs to around 200-225k. This is why I want to target a home in the mid 5 figure range and try to have the entire thing done ASAP. I want to buy now in the winter (or next few months), to try and have ready for the summer.

My only thoughts are to either go in with a few partners (as alluded to in another post, one or two friends would be fine going in as partners, as would FIL) and just pay for the home in cash up front, but coming across 15k per person in cash would be tough... so I would probably need to go through a partnership and then the bank and etc...

OR, I was lucky enough to just go through a process of buying a home and then renovating it almost completely over this past late summer/fall period. After just getting it reappraised, I increased home value by approximately 65k - AFTER you account for home purchase and all materials. We got a great deal but am also lucky my FIL knows how to do almost everything himself from a craftsmanship point of view. My thoughts are to take out a home equity loan for that amount (which I could afford to make payments in the short run on), and then use that to finance the flip?

I know that this is long, but I just don't want to let this time get away. I am still young, and believe if I can do one of these (depending upon structure) for my market and for the time I would be able to put forward on this, I can probably bring in between 10k and 20k over the next 6 months depending on MANY variables. That would be the cash I can use to finance future flips if I choose to move forward, or just a way I can make a HUGE dent in my student loans. BUT, I just need a way to get started and don't know which way to begin.

Any help would be appreciated!

mousebandit

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Re: Best Strategy / Advice on How to Finance a Flip
« Reply #1 on: December 28, 2016, 11:30:07 AM »
How much debt are you carrying, and what kind?  What is your income and cash flow? 

Flips can be awesome, but you need to be financially prepared to carry that sucker if it doesn't sell, or potentially convert to a rental if need be. 

I would be super cautious about multiple partners on a flip.  If your FIL could fully finance it OOP, that could work.  I'm not an advocate of financing very much of the costs to do a flip, unless you can absolutely carry those payments long term, if need be.

That said, I don't want to dampen your enthusiasm.  Get all your plans, improvements, costs, and comps for resale down on paper.  Be professional about it, make absolutely sure your numbers work, and then go after it!

pstu24

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Re: Best Strategy / Advice on How to Finance a Flip
« Reply #2 on: December 29, 2016, 02:29:30 PM »
Debt is only for primary mortgage, student loans (why I want to do the flip) last few months of car payments, and a small amount on a credit card that is more or less negligble (could be gone within the month).

My greatest problem is that my current loan for my house is just under 2x my annual salary (which I think is great - by the way as it is going to be a 'forever' home). While the equity puts the home appraisal closer to 3 ... 3.5 times my salary (depending upon how you classify that with realtor fees and taxes if I were to sell).

If we did a home in the mid 5 figures and kept all costs with materials included under 100k ... I could float the mortgage perpetually although it would be hard. However, the point remains I could still afford my entire current lifestyle as well as a full additional home. And that's before you even consider the potential rental value.

I guess I am wondering - Should I try to bring in more partners to finance it .... should I try to finance the majority of it with a home equity loan + the small amount of cash I have (which combined would cover most of it) ... or should I actually look to have financing from a lender - someone who will even do it online or a local community bank or credit union?

Pretend I realize the risks - pretend I am financially capable of financing this both if it goes well or worse than expected ... and pretend I have the knowledge and ability to make the project work. I guess my biggest question is where can I get started? Because if I am going to do this all by my own cash - that's going to be a few years for me to catch up on and I would hate to waste the opportunity if one of the whole reasons I want to do this is to take the profits and put it all towards my student loan debt (thereby knocking those payments almost completely out of the water).

mousebandit

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Re: Best Strategy / Advice on How to Finance a Flip
« Reply #3 on: December 29, 2016, 03:11:38 PM »
You should probably put up all the numbers for your personal financials, and then a dry-run of estimated costs on a flip, so someone more knowledgeable can analyze it all for you.  My risk-aversion nature would be to do an FHA-rehab loan on the place, and not bring in partners.  Before you jump in, you'll want to analyze the property do make sure it would float as a rental - they use a 1% figure of rents to cost (I think, there's a sticky post here that lays it out) to assess that.  I would recommend you get your financial statements in order, and meet up with a local mortgage broker just to talk about options.  Let them know what you're looking to do, and let them tell you what they see going on in the local market, and what options they can give you for financing. 

Another money-saving / profit-boosting idea would be to rent our your forever home, while you live in and renovate the flip.  Theoretically, the forever home will bring in good rents, and you aren't paying for two homes during the time of the renovation, plus you could qualify for owner-occupancy financing rates.  You could either do a shorter lease on your forever home (like 6 months), with the plan to move back in there when you're done with the flip, or you might decide to do a longer lease on the forever home (or renew the shorter lease) and put your profits into the next flip, and move in there.  ;-)  It's easy to get the bug, once you've had some success, LOL.  As as a single guy (you said you were single, right?) that would be pretty easy to live in squalor for a few months as you fix the places up, haha, and you'd make way more profit. 

Just ideas!  Post more numbers so the experienced real estate folks can help you with solid advice!  I'm mostly a brainstorming idea machine, haha!

Overflow

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Re: Best Strategy / Advice on How to Finance a Flip
« Reply #4 on: December 30, 2016, 07:02:52 AM »

Another money-saving / profit-boosting idea would be to rent our your forever home, while you live in and renovate the flip.  Theoretically, the forever home will bring in good rents, and you aren't paying for two homes during the time of the renovation, plus you could qualify for owner-occupancy financing rates.  You could either do a shorter lease on your forever home (like 6 months), with the plan to move back in there when you're done with the flip, or you might decide to do a longer lease on the forever home (or renew the shorter lease) and put your profits into the next flip, and move in there.  ;-)  It's easy to get the bug, once you've had some success, LOL.  As as a single guy (you said you were single, right?) that would be pretty easy to live in squalor for a few months as you fix the places up, haha, and you'd make way more profit. 

Just ideas!  Post more numbers so the experienced real estate folks can help you with solid advice!  I'm mostly a brainstorming idea machine, haha!

I just completed an FHA 203K (rehab) loan on a duplex. We are living in one side and about to rent out the other. While the paper work for the mortgage and contractors are a bit more complicated, it was a great option for us to get in with low money down.

One note: If you do a FHA 203K, all renovation work has to be completed by a licensed and insured contractor. Anything DIY would have to be paid for out of pocket.

Just some thoughts. I like where you are going with your thinking. Excited to see how things shape up for you.

Bbqmustache

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Re: Best Strategy / Advice on How to Finance a Flip
« Reply #5 on: December 31, 2016, 04:33:25 AM »
Don't.  Pay cash.

pstu24

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Re: Best Strategy / Advice on How to Finance a Flip
« Reply #6 on: December 31, 2016, 05:41:30 PM »
In order to save up enough cash to purchase a house and the fees for closing and all of the renos... I'm trying to keep everything under 100k. However I think it would take a few years to save up 100k best case scenario and I am wasting time and youth in the process.  However,  If I could Finance it at current rates of 4 percent of 100k and assuming I finish the flip in under a year... im.paying 4k in interest but will net as much as 30- 40k in the process which I can then use to finance the next flip. So I think I'm this scenario waiting would be wasting the resource of time.