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The seemingly endless rise in home values in the United States has led to a similar rise in house flipping, which is the act of quickly buying and then selling a home for a profit. As GOBankingRates previously reported, the average profit on house flipping recently reached $66,000 per house.
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These profits are likely to be reduced by rising mortgage rates, especially if you need to borrow money to buy the house you want to flip. Beyond that, there’s a whole list of other costs to consider, including renovations, utilities, property taxes and home insurance.
Depending on your tax bracket and when you sell, your profits could also be reduced by short-term capital gains tax rates between 10% and 37%, according to Mortgage Professional America (MPA).
If you need to borrow money to buy and flip a home, you’ll probably want to avoid the traditional mortgage route, as lenders consider flipping a greater risk and will likely charge you higher rates. Here are five types of alternative loans, cited by MPA.
hard money loans
According to Rocket Mortgage, this is a type of nonconforming short-term loan that typically comes from individuals or businesses who accept a property or other asset as collateral. It’s a good option if you don’t have the best credit score, but you’ll need a high-value asset to get there.
Home equity line of credit
Commonly called HELOC, they work by allowing you to use your own home as collateral. You will get a revolving line of credit based on the equity in your home which takes place in two phases: a drawing period during which you only pay the interest on the line of credit and a repayment period during which you pay both principal and interest. back and can no longer draw on the line of credit.
If you’re considering a HELOC, you’ll need to understand the variable nature of prime interest rates and prepare for possible rate increases during the drawdown period, a TD Bank spokesperson told GOBankingRates.
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Refinancing by withdrawal
A cash-out refinance involves using the equity in another home you own to invest in the home you are flipping. It is one of the cheapest financing options because it carries less risk for the lender.
These usually come from people in your personal network such as friends, family, co-workers and business associates. Money is usually lent in exchange for a share of potential profits or interest payments. Just make sure everything is in writing and approved by a lawyer to avoid later disputes.
The key here is to spread the word in a way that allows you to raise enough individual investor money to fund the home you want to flip. As noted by MPA, that means marketing the project, pitching your business plan, and preparing for rejection. You may also have to settle for a lower percentage of profits, depending on the arrangement.
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