A common misconception with real estate investing is that you need to have a lot of money to get started. While it certainly can help kick-start your investing career, there are several ways to invest in real estate without using any of your own money, and house flipping is one of them.
Fix-and-flip real estate has become a super popular way to invest in real estate, as it can generate nice profits in a short period of time. When you flip a house, you purchase a property that is in need of repairs at a discounted price and then make improvements to the property to increase its value. Once renovations are complete, the property is sold at a higher price, leaving you with a profit.
Financing fix-and-flip real estate is traditionally done with cash because the condition of the home usually disqualifies it from traditional financing. But that doesn't mean you need a pile of cash to get started. Thankfully, there are several creative ways to buy a fix and flip with little to no of your own money. If you're looking to jump into this red-hot investing niche, here are three ways to flip houses with little to no money.
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1. Private money and hard money loans
The private financing market is huge. There are hundreds if not thousands of lenders in the private market that specialize in lending money to investors for fix-and-flip investments. Investors can choose to find money in the private market by talking with friends and family, creating a private loan to help fund the purchase and repairs of a rehab property, or going to a traditional private lending company to get a hard money loan.
Hard money loans are by far the most common financing option for investors. These types of flexible loans are created specifically for properties that need improvements, offering short-term financing for the cost of purchasing the home and most if not all repairs. Every hard money lender will have different qualifications and terms for its loans, but most lenders will charge points, which is a fee ranging from 1% to 2% of the total loan value, in addition to a higher interest rate of around 11% to 15%. Down payment amounts can vary, and it's rare to find a hard money loan with zero money down.
Private loans can have more favorable terms because they are negotiated on an individual basis between the parties. For example, if you're borrowing money from a wealthy friend or family member, they may be willing to offer you no money down in exchange for a higher interest rate. Or you can negotiate a lower interest rate while offering some money down. Either way, both hard money loans and private financing can be viable options for buying a fix and flip with little to no money.
2. Seller financing
Seller financing, also referred to as owner financing, is a special type of loan in which the seller of the property holds or carries financing for the buyer collecting payments from the buyer over the life of the loan. This creative financing option can be a great way to purchase a fix and flip with little to no money, because like private financing, the terms of the loan are negotiated between the buyer and seller. If the property is in particularly bad condition or the seller is in major distress, they may be willing to take no money down up front and receive additional payment at the end of the fix and flip, for example.
Getting seller financing and the terms you receive from the owner will largely depend on the financial circumstances of the seller and your ability to negotiate. Not many property owners are aware this is an option, nor are they in the financial position to be able to hold a mortgage on the property. So while this can be a great way to buy a fix and flip with no money down, it's not super common in practice.
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3. Line of credit
If you have a line of credit with your bank or you have equity built up in your home or other real estate investment, you can use an equity line of credit to fund your real estate purchase. By drawing on a line of credit, you can use the lump sum as the down payment for a private loan, hard money loan, or even cash purchase, essentially borrowing the money from your bank or lending institution at a fixed rate. When the deal is paid off, you pay off the line of credit and use the profits to roll into the next fix and flip.
What to keep in mind
These three methods of financing a rehab property can be creative solutions for reducing your financial commitment into a fix and flip. But it's paramount you understand the responsibilities, expenses, and potential pitfalls of this method of investing. House flipping isn't right for everyone, and it's not uncommon to see new investors make big and costly mistakes in their first few flips.
Before you invest and put in other people's money, or other properties, on the line, make sure you've done your due diligence, understand the ins and outs of flipping, and have a financial plan in case things don't pan out as hoped.
