How To Flip A House With No Money

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Flipping a house involves purchasing a relatively low-cost home (often a foreclosure), fixing it up, and selling it at a profit.^[1] It is an endeavor that carries with it a number of risks as well as some potentially lucrative rewards. There is also a lot of hard work involved in getting a house ready for the market. If you are interested in flipping a home but do not have a lot of money for a down payment, there are other options that will allow you to enter the house-flipping market.

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Evaluate your tolerance for risk. Flipping a house for profit involves a number of costs, including the home down payment, mortgage, interest payments, property taxes, real estate closing costs, inspections, permits, and contractors' fees.^[2] These costs add up quickly, and the flipped house might not sell at a profit. Before you decide whether to go ahead with flipping a house, you should ask yourself:
- What will you do if the house does not sell right away? Would it be possible to use the house as a rental property, for example?^[3] If you do not have a reasonable back-up plan if something goes wrong with the sale of the flipped house, you might want to reevaluate your plans.
- Are the potential profits worth the risk of a considerable loss? In 2015, houses priced below $50,000, saw negative returns. On the other hand, homes priced at $100,000 – $200,000, yielded an average gross return of 44%.^[4] Keep in mind that selling a house in which you have never lived might also involve heavy tax payments, which can lower your profit margin considerably.^[5]
- Can your investment partners weather the risk of a potential loss?
- Have you done your research on local real estate markets, remodeling costs, and permits? In order to have a successful house-flipping experience, you have to educate yourself on local home prices, school districts, responsible contractors, and real estate regulations.^[6]
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Consider your ability to provide "sweat equity," and the value of that work. Sweat equity refers to the amount of value you might add to your home due to your own labor.^[7] For example, if you are a skilled roofer or licensed plumber, perhaps you can undertake some of the home repairs yourself. This will cut down on your overhead and reduce the amount of money you have to borrow.
- Be sure that you take into account the amount of time you'll spend working on the flipped house. Your time also has value, and flipping a house can sometimes take months of work.^[8] Consider whether other ways of spending your time might be more lucrative or more enjoyable.
- More importantly, will the partners putting up the financial stake consider that your sweat equity has any value? If so, how much value compared to their hard cash?
- Be sure to adhere to all local regulations when you undertake home repairs yourself. Discuss your plans with a real estate attorney or local regulations board if you require approval for any construction or repairs.
3
Know your credit score. If you do not have money for a flipped house yourself, you will need to take out a loan to cover your initial costs. No matter who your lender is — a partner, a bank, or a private lender — you will have to demonstrate that you have the capability of repaying your loan. Your credit score reflects your credit history, your ability to pay off your loans, and your overall debt load. The better your credit score, the better the chances that you will be able to secure a loan at an affordable interest rate.
- There are a few different credit rating systems, but in general your credit score will be a number somewhere between 300-850.^[9] The higher your score, the better your credit is.
- You can get a free report with your credit score every 12 months by visiting https://www.annualcreditreport.com/index.action .
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Improve your credit score . If your credit score is too low for you to be able to secure loans for a house-flipping venture, you might want to take some time to improve your credit score. This can take some time, but it might be worthwhile in the long run. Moreover, the better your credit score is, the more likely it is that you will be able to weather a potential loss from house-flipping. To improve your credit score you can:
- Pay off your debts in a timely way. If you do not have a good history of paying off your debt, you will not be able to secure a decent loan for a flipped house.
- Keep your overall debt load to a minimum. Avoid maintaining a credit card balance if you can.
- Only have credit lines when absolutely necessary. Do not have more credit cards than you require for your day-to-day life.
- Protect your identity. Monitor your credit card transactions and your credit rating to make sure that your identity has not been stolen by a thief or a hacker. Take reasonable security precautions to protect your information. For example, do not log into your online banking system unless you are on a secure, password-protected network.
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Talk to a financial advisor. A financial advisor will be able to look at your current financial situation and help you determine how much risk you can afford to take on as part of a house-flipping investment. A financial advisor might also be able to help you come up with a plan for meeting your expenses even if your flipped house takes a long time to sell or requires extra repairs.
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Make a business plan. In order to flip a house successfully, you will have to make your decisions based on logic and research, not on your emotions. Before you begin the process of finding a lender and purchasing a house, it is wise for you to have a solid business plan in place. This plan should keep you on the right track for making a wise investment as well as provide confidence to your potential lenders and partners that you can make a profit. Your business plan should include:
- A maximum purchase price of the home that you will flip.
- A list of in-demand neighborhoods where you will target your search. Pay particular attention to school districts, neighborhood safety, and proximity to amenities such as shops and public transit.
- A maximum cost of repairs and remodels that you can afford.
- A list of dependable, affordable, licensed contractors who can undertake repairs successfully.
- A reasonable estimate for the After Repair Value (ARV) of the flipped home. Ideally, the initial sales price will be no more than 70% of the home's ARV.^[10]
- A sense of who your buyer is and what they want. Will your buyer likely be a retired couple? A young businessperson? A couple with children? Depending on the neighborhood, your potential buyers might want very different things out of a home. Consider who your likely buyer will be and what they might need out of their house. For example, if you are looking at flipping a home in a neighborhood with a great school district, you might consider a remodel that has young children in mind.^[11]
- A specific buyer. In some cases, you might be able to line up a buyer before you flip the house. In this case, your risks are much lower as are your overhead costs.^[12]
- A plan for how to repay your loan if something goes wrong. Do not flip a house unless you can meet your expenses, even if something were to go wrong with your sale. For example, you might have a buyer fall through, or you might discover a problem with the foundation of the home. Build in a margin for error in your business plan, and brainstorm possible ways to weather a delay in the sale of the home or unexpected expenses.

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Locate an investment partner. The most common way for inexperienced house-flippers to enter the market is to find an investment partner. This is especially important for those who do not have the money for the down payment or initial repairs. An investment partner will supply some or all of the start-up cash in exchange for a share of the profits.
- You might consider finding a partner who has a great deal of liquid cash but no interest in doing the legwork for purchasing or refinishing a home. While your partner will supply the cash, you will supply the know-how and labor.
2
Network actively. In order to find an investment partner, you should develop a number of personal and professional contacts in your community. Spread the word that you are interested in undertaking an investment opportunity with a partner. Some ways that you can locate potential partners include:
- Researching active real estate investors. Get in touch with successful, experienced real estate investors who might consider taking a chance on you.
- Joining a Real Estate Investment Club. Many local communities have local chapters of real estate investment clubs. Once you join, you will have access to locals who might share your interests and enthusiasms.^[13]
- Joining a meetup group. Meetup groups are social clubs that sometimes have specific themes, including real estate. Use a meetup group to extend your social network.
- Spreading the word among family and friends. Discuss your dream of flipping houses with those who are already in your social network, such as family, friends, and coworkers. They might be able to put you in touch with others who share your interests or who are looking to invest in real estate.
- Creating your own real estate investment club. If your neighborhood does not yet have a real estate investors' club, you can form your own chapter.^[14] Advertise on Craigslist and through meetup websites in order to find like-minded individuals.
3
Consult an attorney. When you enter into an investment partnership, it is important that you do not simply rely on verbal agreements. Make sure all transactions are reflected in a signed contract. Consult a business or real estate attorney to ensure that both parties are satisfied with the arrangement. Make sure you work out in advance:
- Who covers which costs
- How the profits will be split
- Who will cover potential debts and liabilities
- Who will undertake particular tasks (such as hiring contractors)
- Note security laws that regulate promotion of investments as well as the possibility of investor lawsuits if events don't occur as planned
4

Take it one deal at a time. Some real estate partnerships work spectacularly; others completely fail. Do not lock yourself into a partnership over the long term before you know how well you work with your partner. Instead, take it one house at a time, and evaluate whether your partnership has the potential to be a strong and lasting one.^[15] Take into account whether or not the financial return worked as expected.

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Research hard money lenders. A hard money lender is a company who borrows money from individuals at one interest rate and loans that money to other private individuals at a much higher interest rate. There are many companies that specialize in funding real estate investments such as flipped houses.^[16] Use your social network or internet directories to locate a hard money lender in your area.
2

Recognize the added costs of hard money loans. A hard money loan is likely the easiest kind of loan to secure for a first-time home-flipper who does not have a lot of liquid cash. However, it is also one of the riskier options.^[17] The interest rates from hard money loans tend to be much higher than typical bank mortgages at 8-15%. This can seriously cut into your potential profits from a flipped house.^[18]
3

Collect your financial documents. Before a hard money lender will loan you the cash, you will have to provide them with key information about your financial stability as well as your plans for flipping the house.^[19] They will likely want to examine your tax records, credit rating, and pay stubs. Have your documents at hand to demonstrate to your lender that you are a worthwhile investment opportunity for them.
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Pay an initial 2-10% fee. Another added cost of hard money loans is the initial fee, often referred to as "points." Most fees are between 2-10% of the mortgage cost of the house you will flip. This money provides your lender with some security and serves as a demonstration of your financial viability.^[20]
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Flip the house quickly. Most hard money loans are limited to purchase and rehabilitation of property or construction, and might last from six to 24 months. Hard money loans are not suitable for longer-term investments because of the high fees involved. It is best to use hard money loans on properties that you will be able to turn around quickly to ensure that you are not paying sky-high interest rates.^[21]

1

Consider a private lender. A private lender is an individual with liquid money to spare who is willing to lend you money at a predetermined interest rate.^[22] Unlike a real estate partner who splits the profits with you, a private lender will simply charge you an interest rate before providing you with the cash. In many cases, the interest rates for a private lender are lower than a hard money lender. However, a private lender might be more difficult to find.^[23]
2

Tap your social network for lenders. In many cases you can find a private lender through your own social network. If you know of a relative, friend, or coworker who has liquid cash just sitting around, you might be able to borrow this money and pay them interest. In an ideal scenario, everybody wins: your lender will be able to earn some extra interest, and you will be able to make a profit from your flipped house.^[24]
3

Be aware of potential risks. If you are going to secure a private lender, be sure that both you and your lender are aware of the potential risks of this transaction. Consider what might happen if you do not profit from the flipped house. Will you still be able to make your interest payments? Think through your options before seeking a private lender. In order to preserve your relationship with that person, you will have to pay them back in a timely way.
4

Remember that trust is key. Do not take advantage of a private lender if you want to continue working with them. Trust is the key ingredient of private loans, and you have to demonstrate that you can hold up your end of the bargain. If you are successful, your private lender might be willing to help you finance future real estate investments.

1
Ask your bank for a loan. This option is less likely to occur during your first house-flipping experience, but it is worth a shot. If you have good credit and a solid business plan, your bank might be able to provide you with a loan to purchase a house to flip. These interest rates will likely be higher than a typical mortgage with a 20% down payment, but they will likely be lower than many hard money loans.^[25]
- A bank is more likely to lend construction funds if you can provide a clear lien on the property.
2

Discuss your business plan with your bank. If you have any hope of securing a bank loan, you will require a rock-solid business plan. Be sure to discuss your research with your bank to see if they consider you a worthwhile investment.

1

Evaluate your current assets. Even if you do not have a lot of liquid cash to flip a house, you might still have assets that can help you get lines of credit to purchase a low-cost home to flip.^[26] Examine your own home, your retirement accounts, and your credit lines to see if any of these can be tapped for a down payment.
2
Tap your IRA. An IRA (Independent Retirement Account) is a retirement vehicle. There are serious tax penalties for withdrawing money before the age of 59.5. However, there are exceptions for first-time homebuyers. You can use up to $10,000 of your IRA to purchase a home. Discuss this option with your financial advisor to make sure that you are using the money properly and that you will not incur penalties.^[27]
- Keep in mind that withdrawing money from your IRA might hurt the long-term growth potential of this retirement account. Beware of the risks involved in diminishing your retirement accounts too early.
3
Consider a Home Equity Line of Credit. A home equity line of credit (or HELOC) is a potential option for you if you already own a piece of property. A HELOC provides you with a fast source of cash, and you only have to pay interest on the money that you borrow from the HELOC.^[28] For example, you might have a HELOC that is worth $75,000. But if you borrow $10,000 of that amount, you only pay interest on the $10,000 amount.^[29]
- Be very careful with your HELOC: if you do not repay your loan in a timely way, you are in danger of losing your home.^[30]
- Be aware that HELOC interest rates might be higher than loans from private lenders.
4

Consider using credit cards. Credit cards are another source of quick cash, as long as you plan on paying them off very quickly. The interest rates on credit cards can be very high at 18-20%. However, you are not placing any of your other assets at risk, as you would with a HELOC. You might consider using credit cards for lower-stake purchases during the flipping of a home, such as to purchase building materials from a home goods store.^[31]

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Always do the math before making an investment decision. Price out your time and labor too.^[32]
Be aware that it might be possible for you to make a better return in other ways, such as using your time to work extra shifts or investing your spare cash in the stock market. Treat real estate as just one among many options: do not lock yourself into real estate until you have thought it through.^[33]

It's also extremely important to be fully transparent with your investors and tell them that there is a possible chance of them losing money on your deal. Honesty is the best policy, especially when you're investing other people's money.
Beware that when you're raising money for any sort of venture in which you are intending to use that money for investment purposes, you must be in strict accordance with federal and municipal guidelines. Make sure you consult your attorney before you start raising money for any house flipping venture.
Do not treat house-flipping like a get rich quick scheme. While it can be lucrative, there are enormous risks involved. House-flipping is also profitable only when the investors pour a lot of time and energy into real estate research and home improvements.^[34]
Do not cut corners. Hire licensed, insured contractors who have a good reputation. Always have your property thoroughly inspected. Get permits before undertaking renovations. Skipping these steps can lead to more costs down the road.^[35]

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If you want to flip houses with no money, one way is to locate an investment partner to fund your renovation projects. You can do this by researching active real estate investors and investment clubs and explaining your situation. If they choose to invest in you, they'll give you the money you need to renovate a property in return for a cut of the profit. Alternatively, consider using a hard money loaner. These are companies that borrow money from individuals at one interest rate and loan it to you at a higher rate. However, these generally charge higher rates than investment partners or clubs. For more tips from our Financial co-author, including how to take out a home equity line of credit to flip houses, read on!

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