Looking To Start Flipping Houses? Here Are 5 Types of Alternative Loans To Look For

a young couple take time out from scraping walls in her new house to check against their architect plans.
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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.

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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, Steve Kaminski, TD Bank‘s Head of U.S. Residential Lending 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.

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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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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.

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