Flipping Properties: Where does the money come from?

Flipping properties has become a big market in the past few years. What does it mean to flip a property? Flipping properties is when an investor purchases a property with intent to sell it for profit. Generally properties are sold within 12 months of the initial purchase. There are a few ways that investors execute this investment strategy. They either do the short term or the long term route. The short term route is when investors purchase a property and hold onto that property for a few months ( around 3-4 months) hoping that it will increase in value. The long term route is when investors purchase a property and renovate the home to and sell it for more than originally paid for it.
Across the United States there are numerous areas that have the best markets to flip properties. According to RealtyTrac the best market return in 2014 to flip a property is in Pittsburgh, PA. Flipping properties in this area, investors got 106% return on their investments. The other markets that RealtyTrac as deemed best market returns are in New Orleans, Baltimore, Virginia Beach, Daytona Beach, York-Hanover, Richmond, Chattanooga, Chicago and Atlanta. Within these markets investors got between 54%-76% return on their investments.
There are many different options an investor has in finding the money to flip these properties. The big key thing to think about is that banks are not the only ones in the “world of finance”. Banks are merely one player of the game. Investors with any size wallet can flip a property, they just have to look and find the best option for a loan.
The first stop is always your bank. However it is increasingly difficult for real estate agents to obtain bank loans. What most banks will give real estate agents is the conventional conforming loan. This loan is not guaranteed by the federal government. The best way to explain this loan is that “it complies with Freddie Mac and Fannie Mae guidelines for loan packaging and reselling to investors as securities” (Washington Post).
If you cannot get a loan from your bank, you still have options. You can either do private financing or seller financing. As the name implies, seller financing is when you can convince the seller to finance the deal (taking a note instead of cash). Private financing is when the loan comes from a private citizen. This could be a friend, relative, or a professional private lender. This is a much more flexible and faster loan than any bank loan. These private lenders can be hard to find and the process can be difficult to navigate
These are just a few of the options an investor has to finance this kind of project. The sky is limit if you’d like to flip a property, you just have to be creative.

Hi BridgeLoan,
You make some good points. Many beginners don’t “think outside the bank” in terms of private money for their investments.

I would say, though, that the short term strategy for investors is more about finding a property that needs improvements. Investors create value. Beginners buy and hope. A professional doesn’t get into a property that they haven’t calculated with a reasonable certainty that their improvements will turn a profit.

In the current climate, good properties are hard to find, so there is a surplus of money ready and willing to loan to a good buy.

Find a good property and the money will find you.

Thanks for the post,

George Krajacic

With any loan for a flip property, an investor needs to make sure that there are no pre-payment penalties or required seasoning. Pre-payment penalties are a quick way to eat up any profit in a deal. Loans that require seasoning before a refi or payoff can be an unseen way to pay out profits in monthly expenses.

Most of the flips I’ve done over the years have been with private money. I’m not a big fan of bank loans, especially investor mortgages in that the brokers before 2008 were incredibly (shall we say) liberal and creative to the point that they were walking a thin line…then when the markets were intentionally manipulated, the mortgage companies were reprimanded and changed to very tight underwriting guidelines, which ruined many investor’s careers.

Using private money will allow you to buy as a cash buyer and then re-sell quickly to a qualified buyer without all the red tape.

Remember the old adage…buy low, sell high, and use other people’s money (OPM)…many books written on how to flip houses.

Hope this helps.