How to finance a flip house

The short answer

Most flips get paid for one of four ways: a hard money or fix and flip loan, a HELOC on a home you already own, a loan from a private lender you know, or your own cash. Some investors mix two.

Each one trades cost for risk. Hard money usually costs the most but keeps your own money and your home out of it. A HELOC is often cheaper but puts your house on the line. Private money is whatever you and the lender agree to. Cash costs nothing in interest and ties up the most money. The only fair way to compare them is to run all four on the same deal, so that is what this guide does.

The four ways, in plain terms

Hard money (fix and flip loan). A short-term loan from a lender who funds investors. It is secured by the flip itself and sized off the deal, usually a percent of the price, a percent of the rehab, and a cap tied to the ARV. Expect points up front, interest-only payments, and rehab paid in draws after the work is inspected. How the caps set your loan is its own topic, covered in the loan to cost vs loan to value guide.

HELOC (home equity line of credit). A revolving line secured by a home you own. The CFPB explains that many lenders set the limit as a percent of your home's appraised value minus what you still owe on it, then check your income and credit. Rates are usually variable. You pay interest only on what you draw.

Private money. A loan from a person, often a friend, relative, or someone in your local investor group. Rate, points, term, and when interest gets paid are all negotiable. Done right, it is written up like any other loan, with a promissory note and a mortgage or deed of trust (which one depends on the state) recorded against the flip.

Cash. Your own money, or a partner's. No interest, no lender, no appraisal to wait on. The cost is that the money is stuck in one house until it sells.

Example

Illustrative example. Made-up house, made-up terms, not a real deal or a real lender's quote. You buy for $180,000, plan $45,000 of rehab, and expect to sell for an ARV of $300,000 after a six-month hold. The purchase and rehab together are $225,000.

Some costs are the same no matter how you pay. In this sketch, buying costs are $4,500, holding costs other than interest (taxes, insurance, utilities) are $4,800 for the six months, and selling costs are $24,000. That leaves $41,700 before you pay for the money: $300,000 − $225,000 − $4,500 − $4,800 − $24,000.

Every option below starts from that $41,700. The only things that change are what the money costs, how much of your own cash goes in before the sale, and what you lose if it goes wrong.

All cash. Financing cost is $0, so profit stays at $41,700. Cash out of your pocket before the sale is $234,300: the $225,000 purchase and rehab plus $4,500 buying costs plus $4,800 holding costs. That is about 17.8% on the cash you put in, and almost a quarter of a million dollars sitting in one house for six months.

Hard money on the same deal

Sample terms, shaped like ones flip lenders publish: 90% of the purchase, 100% of the rehab, total loan no more than 75% of ARV, 2 points, 11% interest-only, $1,500 in lender fees. The cost side is $162,000 plus $45,000, or $207,000. The ARV cap is $225,000. The lower number wins, so the loan is $207,000 and you cover the other $18,000 of the purchase.

Two points are $4,140 at closing. At 11% on the full $207,000 from day one, interest is $1,897.50 a month, or $11,385 for six months. Add the $1,500 in fees and the money costs $17,025. Profit drops to $24,675.

Cash out of your pocket before the sale is $44,325: the $18,000 down, $4,140 in points, $1,500 in fees, $11,385 of interest paid monthly, plus the same $4,500 buying and $4,800 holding costs. That is about 55.7% on your cash. Lower profit, much less money tied up.

Two catches. Some lenders charge interest only on the rehab money once it is drawn, which costs less than this sketch. And draws usually pay you back after work is done and inspected, so you may need to float part of the rehab before the first draw comes.

A HELOC on the same deal

Say you own a home worth $600,000 and owe $225,000 on it. Using the CFPB's sample math at 75% of value, the line could be up to $225,000: $450,000 minus the $225,000 you owe. Your lender may approve less after looking at your income and debts.

Draw the full $225,000 for six months at a sample 8.5% variable rate, paying interest only, and interest is $1,593.75 a month, or $9,562.50. Add $500 in sample fees and the money costs $10,062.50. Profit is $31,637.50. If you draw the rehab money as you need it, say for the last four months only, interest falls to about $8,925.

Cash out of your pocket before the sale is $19,362.50: the interest and fees plus the same buying and holding costs. That looks like the best deal on the page. It is also the only one where a bad flip can cost you the house you live in.

Two more risks. The rate can rise while you hold. And a HELOC plan can let the lender freeze or cut the line if your home's value drops a lot or your finances change, which can happen in the middle of a rehab.

This guide assumes a HELOC on your primary home. Lines on rental or investment properties are offered by fewer lenders, often at lower limits and higher rates.

Private money on the same deal

Say a private lender funds the same $207,000 as the hard money loan, at 10% with no points, with interest paid at the sale instead of monthly. You spend $1,000 on an attorney to write the note and record the lien. All of these terms are made up; yours are whatever you negotiate.

Interest is $10,350 for six months. With the $1,000 in legal costs, the money costs $11,350 and profit is $30,350. Cash out of your pocket before the sale is $28,300: the $18,000 down, the $1,000, and the same buying and holding costs.

Here the risk is the relationship. If the flip runs late or loses money, the person you owe is someone you know. Put every term in writing, record the lien, and agree up front on what happens if the house does not sell on time. If you are pooling money from several passive investors, talk to a securities or real estate attorney first. Under federal law every offer and sale of securities must be registered with the SEC or fit an exemption such as Regulation D, and pooled passive investments can count as securities.

Side by side

Same house, same $41,700 before financing, same six months. Illustrative numbers only.

All cash: money costs $0, profit $41,700, $234,300 from your pocket, risk is your own savings in one house.

Hard money: money costs $17,025, profit $24,675, $44,325 from your pocket, risk is the flip and your down payment.

HELOC: money costs $10,062.50, profit $31,637.50, $19,362.50 from your pocket, risk is your home.

Private money: money costs $11,350, profit $30,350, $28,300 from your pocket, risk is the relationship and your down payment.

There is no winner on this list. There is only the one that fits how much cash you have, what you are willing to put up, and how sure you are of the ARV and the schedule.

Mixing sources

One mix you will see is hard money for the house and a HELOC for the gap. In this sketch, the gap is the $18,000 down plus $4,140 in points, or $22,140. At 8.5% for six months, that HELOC draw adds about $940.95 in interest, so the money costs about $17,965.95 and profit is about $23,734.05. You bring far less of your own savings to closing, but the down payment is now borrowed against your home.

Tell the flip lender where the down payment comes from, and ask before you plan on it whether borrowed money can cover the down payment.

What a late sale costs

Add two months to the hold. On the sample terms, hard money adds $3,795 of interest, the HELOC adds $3,187.50 at the same rate, and the private loan adds $3,450. All cash adds nothing for the money, though taxes, insurance, and utilities keep running for every option.

Short-term flip loans also come with a term. If you run past it, ask what an extension costs before you sign, not when you need one. A private lender's patience is a term too; write down what happens at month seven.

Questions to ask before you pick

Hard money lender: What are the caps, and which value does each use? How many points, and what fees? Is interest charged on the full loan or only what is drawn? How do draws work, and how long do they take? What does an extension cost?

HELOC lender: What is the limit and the rate today, and what index does the rate follow? What are the fees? How long is the draw period? Can the line be frozen or cut, and when?

Private lender: What rate and points? Is interest paid monthly or at the sale? What is the term, and what happens if the house has not sold by then? Who writes and records the documents?

Common pitfalls

Comparing rates instead of dollars. An 8.5% HELOC and an 11% loan with 2 points are not two percents to eyeball. Turn each into dollars on the same deal and the same months.

Picking the cheapest money without pricing the risk. The HELOC wins on cost in this sketch and is the only option that can cost you your home.

Planning on six months because the lender's term is twelve. The money keeps costing until the house sells. Run a late case before you buy.

Taking a handshake loan from a friend. No note, no recorded lien, and no agreed plan for a late sale is how a deal turns into a fight.

Forgetting the costs no loan covers. Buying costs, holding costs, selling costs, and overruns come out of your pocket or your profit, however you pay for the house.

Run your own numbers

Start with the deal. The fix and flip calculator shows profit, cash needed, and ROI from your price, rehab, ARV, and loan. The 70% rule calculator gives a maximum offer for your ARV and repairs, and the ARV calculator and rehab cost estimator help with the two numbers that matter most.

Then price the money. The hard money loan calculator turns a loan amount, rate, points, and months into monthly interest, points in dollars, and total interest. Run the same months for each option you are weighing. None of these pages is a loan offer, a rate quote, or an appraisal.

Sources

Consumer Financial Protection Bureau, What you should know about home equity lines of credit, https://files.consumerfinance.gov/f/201603_cfpb_booklet_heloc.pdf. Your home is the collateral; many lenders set the limit as a percent of appraised value (its example uses 75%) minus the mortgage balance, then weigh income and credit; rates are typically variable; costs can include an appraisal, application fee, points, and closing costs; plans generally let lenders freeze or reduce the line if the home's value declines significantly or your finances change materially.

HelpWithMyBank.gov (OCC), Can the bank freeze my HELOC because the value of my home declined?, https://www.helpwithmybank.gov/help-topics/mortgages-home-equity/home-equity-loans-lines-of-credit/heloc-freeze.html. A bank may freeze or reduce a HELOC after a significant decline in the home's value.

Experian, How to Get a Loan to Flip a House, https://www.experian.com/blogs/ask-experian/how-to-get-loan-to-flip-house/. Compares HELOCs, hard money, and other flip financing, and notes that using your home as collateral puts it at risk of foreclosure if you default.

Ambition Lending, Fix and flip loans, https://ambitionlending.co/fix-flip-loans-hard-money-lender/. A flip lender's published structure: 90% of purchase, 100% of rehab, total loan capped at 75% of ARV, and the lowest limit sets the loan.

Unitas Funding, Draw Request Procedure, https://unitasfunding.com/draw-request-procedure. Rehab draws are paid for completed work after an inspection.

U.S. Securities and Exchange Commission, Exempt Offerings, https://www.sec.gov/resources-small-businesses/exempt-offerings. Every offer and sale of securities must be registered under the Securities Act of 1933 or rely on an exemption, including Regulation D Rules 504, 506(b) and 506(c).

Steps

1. Price the deal before the money

   Add the purchase price, rehab, buying costs, holding costs, and selling costs, and subtract them from a realistic ARV. If that number is thin before financing, no loan fixes it.

2. List the money you can actually get

   Your own cash, equity in a home you own, a flip lender, and people who might lend to you. Write down what each will fund and on what terms.

3. Get every cost in writing

   For each source: the rate, points, fees, how interest is charged, the term, extension fees, and when rehab money arrives.

4. Run each option on the same deal

   Same price, same rehab, same months. Work out the financing cost, the cash out of your pocket before the sale, and the profit left over.

5. Add two months and run it again

   Rehabs and sales run late. Price a longer hold for every option, so you know which one still works when the schedule slips.

6. Pick the one whose worst case you can live with

   The cheapest option is not always the right one. Weigh cost against what you put at risk: your savings, your home, or a relationship.

Questions