How to Pay for Homes to Flip
HOW do we buy houses to flip or rent when we already have a personal mortgage? I’ll give you a hint, we are not millionaires with extra cash to spare on buying them all outright! And you don’t need to be either!! When we purchase homes we have two main financing strategies based on the type of investment. For this post, I’ll just go into the details on flipping houses. When we do flips, we have private investors who lend us money so that we can buy houses outright in “cash.” in exchange, the investor is getting a real estate secured loan at a high rate of return (typically 8-12% APR). You probably are wondering why we would go this route when it is more expensive than banks!? A few reasons:
1) Less red tape. Banks want inspections, have more closing costs, and want to regulate your construction. 2) Time! With cash (and less red tape) we can close on a house in only one or two weeks. Plus, construction is quicker without having to report to the bank and time is money in flipping homes. 3) Negotiating power. A cash offer is much more appealing to sellers because it is less likely to fall through. With there being no bank involved, there’s no one prolonging the deal. This makes the closing process much faster, resulting in the seller getting the house off their hands quicker which makes everyone happy. So although we may pay more in interest in the short run, we actually save money in the long run because we can get properties for cheaper, do the project quicker, and have the freedom to do whatever we want without bank regulations. If you could find investors that are willing to pay 100% of your real estate project costs, would you get into real estate investing too??? People often think they can’t invest until they have money but that is a myth! We started right out of college at only 21 and 23 years old!!!
WHERE do you find these investors who are willing to give hundreds of thousands of dollars to pay for YOUR house???
One word: Networking! We are part of several local and national real estate investor groups where we are constantly meeting other investors and learning new strategies. As we meet people, we find many individuals whose form of real estate investing is more passive compared to our strategy. These passive investors are perfect private lenders to flippers. We also talk to other flippers and ask for connections to people they use for funding deals, there are many lending groups who have multi-million dollar funds that are focused on real estate (think of a mutual fund for real estate and you are one of the stocks they are buying).
What shocked us was that our most successful private money lenders are people we already knew in real life! As we started doing real estate investing and talking with people about it, it’s amazing the amount of people that come out of the woodwork interested in becoming a real estate investor themselves. Often, they don’t have time to dedicate to managing contractors or tenants so the easiest way for them is to be a lender on an investment. For them it provides a solid investment return that is backed by a physical asset (if something happened to Kyle and I or we defaulted, the investor has rights to the property just like a bank). One last note, did you know that you can use your retirement account to invest in real estate??? They are called self-directed IRAs which places all returns back into the retirement account. This is a popular way for people who are trying to increase their retirement returns by investing into real estate! There are so many private money investors that are chomping at the bit to find good quality flippers to invest with. You literally can start with $0 out of your own pocket, all you have to do is open your mouth and start networking! ...and find a good house to flip, of course.