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The seemingly never-ending rise of home values in the United States has led to a similar rise in house flipping, which involves buying and then quickly selling a home at a profit. As GOBankingRates previously reported, the average profit on house flipping recently hit $66,000 per home.
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Those profits are likely to get squeezed 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 laundry list of other costs to consider, including renovations, utilities, property taxes and homeowners insurance.
Depending on your tax bracket and when you sell, your profits could also get reduced by short-term capital gains tax rates ranging between 10% and 37%, according to Mortgage Professional America (MPA).
If you need to borrow money to buy and flip a home, you probably want to bypass the traditional mortgage route because lenders consider flipping a bigger risk and will likely charge you higher rates. Here are five types of alternative loans, as cited by MPA.
Hard Money Loans
This is a type of a short-term, non-conforming loan that usually comes from individuals or businesses that accept property or some other asset as collateral, according to Rocket Mortgage. This is a good option if you don’t have the best credit score, but you will need some kind of high-value asset to make it happen.
Home Equity Line of Credit
Commonly known as HELOCs, these work by letting you use your own house as collateral. You’ll get a revolving line of credit based on the equity of your home that comes in two phases: a draw period in which you pay only interest on the line of credit, and a repayment period in which you pay both the principal and interest back and can no longer draw on the line of credit.
If you consider a HELOC, you’ll need to understand the variable nature of prime-based interest rates and be prepared for potential rate increases during the draw period, a spokesperson for TD Bank told GOBankingRates.
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Cash-Out Refinance
A cash-out refinance involves using the equity from another home you own to invest in the home you are flipping. It’s one of the cheaper financing options because it carries less risk for the lender.
Personal Loans
These typically come from people in your personal network such as friends, family members, work colleagues and business associates. The money is usually lent in exchange for a share of potential profits or interest payments. Just make sure to get everything in writing and approved by a lawyer to avoid conflicts down the road.
Crowdfunding
The key here is to spread the word in a way that lets you amass enough individual investor money to finance the home you want to flip. As MPA noted, this means marketing the project, pitching your business plan and preparing for rejection. You might also have to settle for a smaller percentage of the profits, depending on the arrangement.
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