Different Ways To Finance a Flip
There are 4 different types of ways to finance a flip. Here they are in order form most expensive to least;
This is the most flexible form of financing since you are not dealing with a regulated lender. With private lending, the terms and rates can vary substantially depending on the lender. Private lenders will usually give you flexible terms and allow you to make interest-only payments which reduces your carrying costs. Private lenders will charge a higher rate than conventional lenders. It’s common to see rates between 8%-12% plus & an additional 2-5% of the loan that is charged upfront for structuring the loan.
There are some alternative lenders in Ontario that will provide mortgages that are specifically designed for flips. These loans are usually an open term which means that you can pay back the loan at any time without a penalty. Interest rates for these loans are typically lower than private loans but still higher than a conventional mortgage. You will be required to make monthly payments on both principal and interest. These lenders will loan 75-80% of the property value depending on the property and buyers. Rates can start at 5.99% and there is usually a 2-4% charge upfront for structuring the loan.
They have lower interest rates and minimum initial set up fees for the loan. However, these loans are much harder to get for flippers and there is a lot of red tape that you must go through. If your credit is not great or you are already leveraged, you will likely not qualify for a conventional loan.
This is a home equity line of credit. This is by far the easiest and cheapest way to finance a loan. Basically, what you are doing is borrowing against the equity that you have in another property. This line of credit will have the lowest rates, allow you to make interest-only payments, and can be paid off at any time without a penalty. Obviously, to get a HELOC you must already have a substantial amount of equity in a property that you own.
Lastly, you can always flip houses with your own cash but this is not really leveraging your money wisely.