Looking to start flipping houses? Here are 5 alternative loan types to look out for

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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 buying and then quickly 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 rating, 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 be prepared for possible rate increases during the drawdown period, Steve Kaminski, head of U.S. residential lending at GOBankingRates, told GOBankingRates. TD Bank.

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Refinancing by collection

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.

Personal loans

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.

Crowdfunding

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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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work has also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal, and Business North Carolina magazine. He holds a BA in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting has earned him awards from the North Carolina Press Association, Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A North Carolina native who also writes fiction, Vance’s short story “Saint Christopher” placed second in the 2019 Writer’s Digest short story competition. Two of her short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. Her first novel, Voodoo Hideaway, is published in 2021 by Atmosphere Press.

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