Best Loans for Flipping Houses

After an endless string of TV shows featuring house flipping, you get the concept. You buy a fixer-upper, renovate it to force appreciation, then sell it for a profit. 

But that raises a question for novice real estate investors: “How do I find loans for flipping houses?”

Fortunately, financing proves one of the easier aspects of investing in real estate. You have plenty of options, among both lenders and types of loans for flipping houses.

Don’t stress over financing. Follow this quick guide to finding the best loans for flipping houses based on your needs. 

The Costs of Flipping a House

Many beginner real estate investors don’t fully understand the expenses involved in flipping a house.

Sure, you’ll need to come up with a down payment. But beyond that, you’ll also come out of pocket for two rounds of closing costs, carrying costs, initial renovation costs (before being reimbursed), and inevitable cost overruns. 

As a buyer, you’ll pay closing costs including lender fees, title fees, attorney or settlement fees, the appraisal fees, your share of recordation fees and transfer taxes, the insurance premium, and prorated property taxes. If you get a home inspection, you’ll pay for that too. 

While you own the property, you’ll make monthly loan payments of course. You’ll also have to pay for utilities. The longer the renovation takes, the more you’ll pay in carrying costs, and the lower your profit. In this context, time really is money. 

Speaking of the renovation, most lenders do cover 100% of the renovation costs — but they reimburse you for them in draws. When you first take out the loan, you work out a draw schedule with the lender: the phases of the rehab project, and the amount reimbursed as you complete each phase. But you pay for the initial materials and possibly labor, before the lender reimburses for that draw. 

Upon selling the house, you pay another round of closing costs. These include real estate agent commissions, your share of recordation fees and transfer taxes, and any seller concession negotiated by the buyer. 

Accurate Cost Planning

If you underestimate the costs involved in a house flip, you overestimate your profits. You could even end up losing money, depending on how badly you miss on the expense forecasting. 

Before making an offer on a fixer-upper, you need to calculate your maximum allowable offer to avoid losing money. You must accurately estimate the rehab costs, carrying costs, and both sets of closing costs. 

That lets you back into an offer amount — or at least a ceiling price that you can’t exceed. 

For example, Rocket Mortgage estimates that the average homebuyer pays 3-6% of the loan amount in closing costs. You’ll likely pay 5-6% of the purchase price as a flipper, paying higher loan fees than the average homebuyer. 

When you go to sell, you’ll likely pay another 6-8% of the sales price in Realtor commissions and other seller costs. 

Most of all, dig into the renovation costs. Get many quotes from contractors, and always budget for cost overruns (just don’t tell your contractor, or they’ll find ways to spend every last penny you budgeted as a buffer). Consider setting aside 20-25% extra for cost overruns, beyond what you think the renovations will cost. 

Use our rehab cost estimator to help you run the numbers and stay in-budget. 

Sample House Flip Costs

Ingrid Investor finds a house with an after-repair value (ARV) of $315,000, which she conservatively pegs at $300,000. After collecting quotes from contractors, she calculates that it needs $75,000 in renovations, including a buffer for cost overruns. 

The 70% Rule dictates that she can afford to offer up to 70% of the ARV minus the renovation costs. In this case, that’s $157,500: $300,000 – $75,000 ($225,000) X 70%. 

Digging into those numbers, she estimates that she’ll lose 7% of the sales price in seller closing costs, or $21,000. She sets aside 5% of the purchase price for buyer-side closing costs: $157,500 X 5% = $7,875. She also estimates that each month of ownership will cost her around 1% of the purchase price, or $1,575, and that she’ll hold the property for nine months at the longest. 

Those costs add up as follows:

• Purchase Price: $157,500
• Buyer Closing Costs: $7,875
• Renovation Costs: $75,000
• Carrying Costs: $14,175
• Seller Closing Costs: $21,000

Total Costs: $275,550

That doesn’t leave her with a huge profit — under $25,000. She decides to offer $150,000 initially, but if the seller balks, she feels comfortable that a $300,000 sales price truly is a worst-case scenario, so she’s willing to come back with a final offer of $157,500. 

Follow this house flipping checklist as you explore doing your first house flip. 

Types of Loans for House Flipping

As touched on above, you have plenty of options as you scout out the best loans for flipping houses.

Consider mixing and matching as well, to get creative with your approach to financing. 

Hard Money Loans

Historically, hard money loans have served as the bread and butter of financing for flips. 

Hard money lenders specialize in purchase-rehab loans for flipping houses or BRRRR deals. They typically fund 60-80% of the purchase price, and 100% of the renovation costs, for a combined loan-to-value ratio (LTV) of 70-90%. These loans come with short terms, usually 12-24 months.

These lenders can typically close quickly, usually within two to three weeks. They also offer flexibility in underwriting, and are used to seeing quirky projects. 

For their flexibility in working with flippers, hard money lenders charge a pretty penny. Expect 9-16% interest, plus two to six points (a point is a lender fee equalling 1% of the loan amount). In most cases, hard money loans are interest-only. 

Ultimately, the interest doesn’t matter that much, given that most flippers only make a handful of monthly payments. The points are where the real pain lies, so focus more on minimizing points rather than interest on hard money loans. 

Pros: Fast, flexible, designed for buying and renovating fixer-uppers.

Cons: Expensive, low LTV.

Seller Financing & Other Private Loans

Unlike hard money lenders, private money lenders aren’t in the business of lending money. 

You could borrow money privately from friends and family, or other people you know personally. Or you could negotiate owner financing with the seller.  

Seller financing can help you save money compared to a hard money lender, and possibly borrow a higher LTV ratio. You may even be able to assume the seller’s existing mortgage, to keep your interest low. 

Just don’t expect sellers to open their wallet the moment you propose it. You’ll need to learn how to explain and negotiate seller financing in terms that persuade the seller that it really does serve their interests too. 

Pros: Negotiable terms, potentially lower fees and interest, flexible.

Cons: Requires convincing a private citizen to become a money lender.

Conventional Loans (for Live-In Flips)

If you plan to move into the home yourself for at least a year, consider a live-in flip. 

You have a few strategies you could follow here. In the first, you move in immediately upon purchasing, and then renovate the home at your leisure while living in it. This strategy works well for DIY hobbyists who enjoy doing much of the work themselves on nights and weekends. The home must be in habitable condition upon purchase however, for conventional lenders to issue a loan. 

Alternatively, you could renovate the home before moving in, using a bank loan. Examples of homeowner renovation loan programs include FHA 203(k) loans, Fannie Mae Homestyle Renovation loans, Freddie Mac CHOICERenovation, and VA and USDA loans for certain borrowers. You must hire licensed contractors to perform all of the work however — no tinkering yourself on weekends. 

These options come with some huge upsides, including a low down payment, low interest rate, and the possibility of avoiding capital gains taxes through the Section 121 exclusion. Also known as the homeowner exemption, it allows single homeowners to avoid paying capital gains taxes on the first $250,000 in profits if they lived in the home for at least two of the last five years. For married couples, that doubles to $500,000. 

Pros: Low interest rate, low fees, low down payment, can live in the property to minimize housing costs, can renovate yourself at your own pace, possibility of homeowner exclusion on capital gains tax.

Cons: Owner-occupancy requirement, less flexible financing terms.

Second Mortgages & HELOCs

For all those advantages of live-in flips, most house flippers don’t want to move frequently, or live in a construction site. 

Some flippers also own rental properties however, or have plenty of equity in their current home. They can tap into that equity by borrowing a second mortgage (a home equity loan) or a HELOC (home equity line of credit). 

They can then put that money toward flipping houses, to cover the down payment or perhaps even to cover the entire project’s costs. Upon flipping the house, they can either pay off the balance or roll it into the next house flip.

Just beware that these require an extra closing, which means thousands of dollars in extra settlement costs. 

Pros: Lower interest rates and fees than hard money loans, rotating line of credit (HELOC), possibility of supplementing a hard money loan to minimize out-of-pocket costs.

Cons: Extra settlement costs unrelated to your flip, requires enormous existing equity in a property.

Unsecured Credit

What if you don’t have equity in another property, but you still want to borrow money to help cover the down payment, closing costs, and initial repairs of a house flip?

You can get even more creative with loans for flipping houses. For example, I once bought and renovated a house with credit card balances alone. 

Flippers can put the materials directly on the credit card, and some contractors accept payment from cards as well nowadays. For those who don’t, you can use a service like Plastiq to draw cash from your card without it appearing as a cash advance. Plastiq charges 2.9% to do so, but you can recoup some or all of that with credit card rewards. 

In fact, you don’t even have to use a personal credit card. Business credit concierge services like Fund & Grow help you own business credit cards and lines of credit, with up to $250,000 in credit. Often the cards come with an introductory 0% APR offer for the first 12-24 months, so you won’t even pay interest. 

And yes, real estate flippers are in business, and qualify for business credit cards and loans. 

As a final thought, you can also borrow personal loans to cover house flipping costs. Just beware that these tend to come with high interest rates and low maximum loan amounts. 

Best of all, none of these require an expensive settlement with title fees and lender junk fees. 

Pros: Flexibility, introductory 0% interest possible, no expensive closing required.

Cons: High interest rates, fees to pull cash from credit cards, low individual credit limits. 

Choosing the Best Loan for Your House Flip

When you’re first starting out, stick with tried and true hard money loans. Come up with cash for the down payment and closing costs, so when you inevitably make mistakes that cost you, it doesn’t leave you overleveraged and in the red. 

No novice real estate investor wants to hear it, but the less experience you have, the less leverage you should use. 

“But as a beginner, I don’t have much cash!” 

Flipping houses is a business, and it costs money to start a business. Save up capital from elsewhere to launch your flipping business. 

Start by comparing hard money lenders like Kiavi, New Silver, Lending One, and RCN Capital. Double check not just their interest rates but also their fees (including both points and flat fees), loan-to-value ratios, credit requirements, and speed of funding. 

Aim to build a relationship with at least two hard money lenders. The more experience you have with a lender, the more flexibly they’ll underwrite your loans moving forward. 

As you gain experience and get the mistakes out of your system, you can start scaling and using more leverage. You can start borrowing secondary funds from friends and family, or HELOCs, or business lines of credit. You can start negotiating seller financing, perhaps assuming seller mortgages and setting up wraparound mortgages with the seller. 

Heavy leverage and combining several loans for flipping houses can wait however. First, you need to learn the business before you dig yourself into a pit of debt. 

As a final thought, live-in flips can make a great first foray into the business of flipping houses. You can borrow low-interest loans with a slim down payment, and gain experience on your own home before flipping others.

Final Word

What are the best loans for flipping houses? It depends on your experience level and needs. 

Hard money loans offer a baseline, which you can build on as you gain experience. You can start combining other types of loans for flipping houses to minimize the cash tied up by any one house flip. That lets you start running multiple house flips at the same time. 

Go beyond thinking just in terms of loans for flipping houses, to building a “financing toolkit” that you can mix and match as needed. For one deal, you might combine a hard money loan with business credit cards. For the next, you might combine seller financing with funds drawn from your HELOC. 

In fact, that HELOC may have been possible because of all the home equity you created by moving into a fixer-upper yourself. 

See how these financing options all start building on each other?

It all starts with doing your first few house flips and getting some firsthand experience under your belt. Begin by building relationships with one or two hard money lenders, and expand your financing toolkit from there.