The #1 question I get from students at the Real Estate Academy and my workshops and seminars is: Where can I find funding for my flips? While seasoned investors and home flippers likely have solid cash reserves on hand to close upcoming deals, those new to the industry probably don’t—or at least not enough to make quick, clean all-cash offers.
Unlike purchasing a primary residence or, even a second home, investment properties are often all-cash or cash-heavy transactions. To play, most buyers needs access to tens of thousands or even hundreds of thousands of dollars ready to go at a moment’s notice. Whether you’re buying via auctions, wholesalers or agents, the best deals will have buyers lining up around the proverbial block. If you want to set your offer apart, you’ve got to be fast, be compelling and above all, be funded. And funded well.
With that said, you don’t need to necessarily have a million dollars burning a hole in your bank account. So take a breath. The majority of investors I know don’t. It’s bad business—why leave that much cash sitting around, when it could be growing in a tangible investment?
So, in that case, where does the funding come from? No matter your experience level, credit history or funds available, you’ve got a host of options, from hard money lenders to private lenders to personal sources, plus a few in between. To get funding from these sources, though, you’ll need to be strategic, organized and well-prepared, with a fully articulated investor package that clearly and succinctly outlines why they should fund you.
I’ve made things easier by providing a downloadable investor package template on my website.
At its most basic level, an investor package highlights what the deal you’re proposing looks like, and walks readers through how they’ll make money by investing with you right now. There’s much more detail in my investor package template but, in short, here’s what you’ll need to include in yours:
- Photos of the property and neighborhood; plan to include exteriors and interiors, if available
- Rehab budget based on estimates your contractor and other vendors have delivered. Be sure your budget can be backed up by professional estimates and isn’t just wishful thinking… investors can see right through faulty numbers or underestimations.
- Summary and map of the area, including a short blurb about the immediate neighborhood/community and how other properties are selling. Be sure to highlight what makes this area desirable: great schools, sought after amenities, accessibility, and why flipping this property makes sense.
- Specifications, including the original listing sheet provided by the agent, which has every spec under the sun… and then
- Comps that justify the after repair value (ARV), or the valuation you’ve assigned the property post-renovations, pre-resale.
- Exit strategy which summarizes the deal along with how you’ll go about purchasing, renovating and flipping the property—and of course, the timeframe associated. Is this a quick flip, or will investors’ money be sitting for the next year? And, while it may seem excessive, be sure to make it very clear that you’re flipping the property and not keeping it for rental income, for example. Because these lenders participate in many different deals, it’s essential to be crystal clear in what’s expected and what comes next, so there are no unexpected bumps closer to close.
Got it all together? Your next step is to organize it into one professional, cohesive investor package. (Again, check out my site for a downloadable template, and get it in the hands of prospective lenders and investors…fast.) With your packet built, here’s who to turn to for that all-important funding…
If you’re considering HARD MONEY LENDERS
Hard money lenders will loan you money for your real estate deals simply on the merit of the deal—and that’s why your investor packet is so critical. Typically hard money lenders will lend up to a certain value—a value that, if you default on the loan, they can take possession of the property and still make money.
To get to that number, hard money lenders do an independent assessment of the property and determine their own value, post-rehab. In most cases, lenders will then fund up to 65% of the ARV based on their calculations, which is usually a good foundation for these types of purchases. They’ll also want to see that you, the buyer, have some solid skin in the game. Without any “real” money invested, it’s easier for you to walk away, at least in the lender’s eyes. This can be your own cash investment, money from other sources (more on this later) or funding from a private money lender. Simply, don’t let a lack of cash hold you back from a great deal—the money will come if you’re persistent, consistent and keep pounding the pavement.
When dealing with hard money lenders, be prepared to ante up some additional fees for origination points. You’ll typically pay 3-5% (three to five points) with a 12-15% interest rate for your loans. These fees are, essentially, your hard money lender’s cost of doing business—think reviewing the comps, your application processing and other resource allocations tied to lending you money. Be wary of hard money lenders who charge a point or two right out of the gate, though. They’re often not legit. I’ve seen many people pay these fraudulent points only to lose their money and not get the funding they were promised. Not good.
All about PRIVATE MONEY LENDERS
The alternative to hard money lenders is to tap a private money lender. Private lenders are, literally, any single person or group of people lending money outside of a traditional bank or brokerage structure. This person or group invests their own money to help you close your deals. It could be a friend or relative who you’ve offered a good return on their investment in exchange for a low- or no-interest loan, a more formal peer lending system or something entirely different. But always, private lending has that personal touch.
If you don’t already have options for private money lenders, sites like PrivateMoneyPro.com can be incredibly helpful. This site lists 200+ private lenders across the country, looking to fund all sorts of deals. You can purchase a list quickly, easily and at a very low cost (a great bonus!), and you’ll instantly have access to more lenders than you could ever need. The next step? Start your outreach and start getting that investor packet in front of them! You’ve got nothing to lose and infinite amounts to gain. I recommend these lists to my students year after year in the Real Estate Academy, and in my experience, I haven’t seen any others even come close to the quality, consistency and accuracy of their lists.
There are several benefits to private money lenders. Typically, the approval process is quicker and less formal. While you’ll likely need to provide a walk-through of your investor packet, since you’re going person-to-person, there’s often less emphasis on the heavy duty checks associated with the traditional underwriting process. You’re also more likely to get favorable terms from a private lender—lower interest rates and very few points, if any. Private lenders are also more likely to fund a bigger piece of your upcoming deals. While hard money lenders are often limited to 65% of the ARV, private lenders can invest more—some will even assume 100% of the upfront cost of your deal, helping to speed the process along considerably.
Beyond hard money lenders and private lenders, you’ve likely got a handful of other strategic funding solutions at your fingertips. If you’re a homeowner or own other properties, you can pull from a Home Equity Line of Credit (HELOC) and fund your investment solo. You can also investigate pulling from an existing IRA or 401K. Some have self-directed investment options that allow you to utilize funds for real estate deals, without any early withdrawal penalties or hefty tax burdens. Be sure to double check with your service provider first, though—if this isn’t part of your plan, you could owe tens or even hundreds of thousands of dollars come tax time.
There are also outside companies that specifically provide “gap funds” to help close these types of real estate deals. Interest rates can be a bit high, and they’re typically used only on a short-term basis. But, if you’ve got a solid plan of attack and are ready to move on a profitable deal, that might not be a deterrent.
No matter which route you choose, know this: asking for money from anyone is tough, especially the first few times. But it gets easier and easier with each deal you successfully fund and close. In those early days, keep reminding yourself that you’re doing a great thing for your lender(s), whether private or hard money—you’re delivering real, tangible value and a concrete return on their investment. Who wouldn’t want that? If you’ve got a good deal on the table, you’ll no doubt find the money to fund it… it may just take a few asks to get there.
Start networking, build out a strategic investor packet using my online template, and don’t be afraid to ask for help. You’re providing serious value for prospective lenders and investors, and you’re giving them an opportunity to make serious money they couldn’t make without you and this well-structured deal. With those pieces in place, and that powerhouse mindset, chances are, you’ll be well on your way to having all the solid funding you need for all your deals.