Forget about all those shows you’ve been watching on television or the books you’ve been reading over the past few years. The reality is if you “ain’t” got no money you can’t flip a house. Numerous hopeful flippers think they can just wake up one morning, go flip a house, then all of their problems would be solved. But unfortunately if you don’t already have some money to play with, and maybe even lose, flipping a house isn’t the answer. Here are a few reasons why you need money to flip a house.
First things first, unless you got plenty of cash in the bank to buy a house and renovate, you’re going to need to satisfy the requirements of a bank. Many banks require that borrowers put down at least 20% of the sales price. But remember, that 20% doesn’t include closing cost which is the cost you pay for borrowing money in conjunction with attorney fees, pre-paid insurance premiums, and recording fees.
Secondly, you’re going to need money for the actual renovation. Banks will lend you the money for this but of course it’s going to cost you. Most banks will only lend you up to 80% of the renovation cost. The rest you’ll have to finance yourself through either your personal funds, a line of credit, or borrowed money from maybe friends and family. You can also take the route of finding a hard money lender but that may be your absolute last resort as the interest rates are typically higher than conventional loans.
But that’s not it! You also need to have money for your “Oh Shit” fund. Your “oh shit” fund is the money you have set aside when something inevitably goes wrong during construction or something pops up once you open up the walls that you didn’t plan for in your initial estimation. These problems will have to be remedied and the best way to solve them is through having some stored cash waiting in the war chest. If you have to borrow more money to solve the problem you can find yourself cutting into your profit margin and who wants that!
Lastly, you got to have money for carrying cost. Don’t forget, the moment your house close the clock starts ticking. The typical flip can take anywhere from 8 – 16 weeks to complete for a crew who knows what they’re doing. If you’re just starting out and you can’t afford to hire sub contractors to do the work chances are you’re doing it yourself along with maybe your uncle or someone else who cares about you and have a little more construction experience than you. Every month that goes by you’ll have your mortgage due, light bill, water bill, gas bill, and whatever other monthly overhead expense you need to pay to stay afloat. This can run on for several months unless you can get the work done right and fairly fast.
There aren’t too many things you can do, legally, that can net you the kind of returns flipping a house can. But remember, it takes money to make money, so think about where you’re going to raise capital from before you try your luck at flipping properties.