So, you’ve been watching a little too much HGTV lately and house flipping has your attention. And for many people it’s because of this magical phrase: “No money down.”
Can you really flip a house with no money down? It is possible. But there are several things you need to be aware of first.
Understand the wholesale market
The indirect method is the easiest way to do this. But you have to know the wholesale market.
One of the most basic rules you need to know is the 70 percent rule: never pay more than 70 percent of ARV when you’re planning to flip a house. Now, this is a rule of thumb, not an ironclad law, but it’s a good one to keep in mind.
What is ARV? It’s after repair value. You’re going to have to invest money in the house. And to get that ARV, you need to study your comps, or comparable properties in the area.
Trying to get into house flipping? Watch HGTV and pay attention to the basics. You need to learn how it all works. Be as close to house flipping as you can without getting into it.
Many people think a bank will lend 80 percent if they’re trying to flip a property. Not exactly. It’s often lower for investment real estate. Usually you can only get up to about 75 percent on investment real estate as opposed to retail. That may fluctuate a little depending on the bank or credit union. That means you have around 20 to 25 percent of the value of the property to come up with.
A construction loan is one of the best ways to get around this. If the property is getting a total rehab, some banks will finance up to 75 percent of the ARV if you bring cash to the closing. That allows you to get a higher loan. Larger banks got in trouble with this, but smaller banks may still be willing to do this. You can get very close to no money down this way.
Add in what the market calls “other people’s money”, or OPM. You can do a joint venture or a second position in a property with a partner you’re comfortable with. For example, if they bring 25 percent of the money, they get half the return on sell.
You could also bring the same numbers to a private investor and finance the entire thing. Ask for 66 percent of loan value (pretty safe) and offer 8, 10, or 12 percent. They make an aggressive return over a short amount of time secured by real estate. That could be private money with friends and family or you can also find someone who deals in hard money.
You can get creative with loans, equities and deal structure for the accounting. We have resources on how to do that, and we can also help walk you through the process if you’re new to it.
House flipping for no money down is a very popular venture right now, but if you want to get into it you need to know what you’re doing. Take advantage of our experience and knowledge of real estate bookkeeping and contact us today.