Flipping houses requires a significant financial commitment, and understanding these requirements is essential for aspiring investors.
Here’s a breakdown of the costs and financing options to consider when planning a house flip.
How Much Money Do You Need to Flip a House?
Generally, flippers who don’t have special access to capital should anticipate needing at least 20% of the purchase price as a down payment, alongside additional funds for renovations.
For a typical first-time flipper, a budget of around $250,000 to $400,000 is reasonable to cover both the purchase and renovation costs in most markets. This budget can vary widely depending on the property’s location, condition, and the scope of renovations planned.
Without special access to capital through a franchise system like New Again Houses, flippers can expect to get financing for 75% of that total cost. That means house flippers operating on their own will need $75,000 to $100,000 per project, monthly interest payments, and holding costs totaling approximately 1% of the house’s value.
What Is the 70% Rule in House Flipping?
The 70% rule is a popular guideline in house flipping that helps ensure sufficient profit margins. According to this rule, you should pay no more than 70% of the after repair value (ARV) of a property, minus the estimated repair costs.
For example, if the ARV of a property is $300,000 and you estimate $50,000 in repairs, your maximum purchase price should be as follows:
Maximum Purchase Price = (ARV x 0.70) – Repair Costs
Maximum Purchase Price = (300,000 x 0.70) – 50,000
Maximum Purchase Price = 210,000 – 50,000 = 160,000
Maximum Purchase Price = $160,000
By following the 70% rule, you can better protect your investment and enhance your chances of achieving a profitable flip.
However, keep in mind that the 70% rule is primarily designed for beginners operating without support or experience. Professional house flippers will often exceed 70% to purchase less risky properties in better locations. By leveraging the competitive advantages of scale, they are still able to successfully flip higher-quality properties by exceeding the 70% rule.
How to Get Financing to Flip a House: 4 Financing Options for House Flippers
While cash offers can expedite the buying process and make you more competitive in a hot market, many investors use various financing options to fund their flips. Consider these common methods.
New Again Houses Franchise
New Again Houses franchise owners have exclusive access to funding through Alta Capital. Alta Capital has been lending money exclusively to New Again Houses owners since 2013. Alta helps minimize the cash required by financing up to 93% of the total cost while not requiring appraisal fees or interest payments during the construction project.
Hard Money Loans
Hard money loans are short-term loans secured by the property itself. Hard money lenders focus more on the value of the property than on the borrower’s credit history, making them a popular choice for house flippers. However, they often come with higher interest rates and fees.
Conventional Mortgages
For buyers with good credit and a solid financial history, conventional mortgages can be a viable option. These loans typically require a larger down payment and involve a longer approval process but offer lower interest rates compared to hard money loans.
Private Money Lenders
Private money lenders are individuals who lend based on personal relationships and agreements. Private money can come from friends, family, or acquaintances who believe in your flipping potential. Terms can be more flexible, but it’s important to establish clear agreements to avoid misunderstandings.
Home Equity Lines of Credit (HELOCs)
If you own other properties, you can leverage existing equity to finance your flip. A HELOC provides access to funds based on your home’s equity, offering flexibility and potentially lower interest rates.