How to Get a Loan to Flip a House

man repairing the interior of a house

Fix-and-flips—where you buy a distressed house for a low price, fix it up and attempt to resell it for a profit—can be lucrative. To fund the purchase and renovation of the home, you may need a loan in the form of a home equity line of credit, hard money loan, personal loan or peer-to-peer loan.

These real estate investments can be risky and often require financial and real estate expertise to pull off successfully; knowing how much money you'll need to buy and prepare the home for resale is an important first step in the process. Here are some of the major costs you'll need to take into account when considering how to fund your home flip, plus the types of loans you can consider.

Costs of Flipping a House

The goal of a fix-and-flip is to buy a property for cheap, make improvements and sell it for a profit. Buying a house to flip is a major investment that typically requires a lot of upfront capital.

Underbudgeting for a home flip could mean ending up with a home that's worth less than what you've put into it. To avoid this worst-case scenario, it's better to overbudget for unexpected or hidden costs.

For your flip to be successful, the sale price you ultimately get for the home will need to be greater than all the costs that go into funding the flip. Account for the following:

Purchase Price

The purchase or acquisition price of the house is how much money you need to buy it.

Even though you'll likely be working with a lender to fund your home flip, you'll still need to pay a certain amount as a downpayment, depending on the type of loan you qualify for. You should generally expect to pay about 20% to 25% down on a home flip. For example, if you're buying a property for $250,000 and want to make a 25% down payment, you should expect to pay about $62,500.

Renovation Costs

The other major expense of a home flip is the cost to improve the property. Your costs will vary depending on the size of the home, the severity of your renovations, as well as the local price of labor and materials.

According to a case study published by Flipperforce, the cost to renovate a flipped property can range anywhere from $10 per square foot for cosmetic alterations to $80 per square foot for a full home gutting. That means light work on a small home could cost $10,000 while major renovations on a larger home could end up costing more than $100,000.

To determine exactly how much you'll need to set aside for renovations and repairs, it helps to work with an experienced real estate investor who can walk through the property with you to help you evaluate where the most value can be added and whether renovating the home will reap a high return on investment. Homes with major structural issues may not be profitable, for instance.

Carrying Costs

Carrying costs are what it costs to own an investment property. It's easy to overlook these expenses when crunching the numbers on a fix-and-flip, and not accounting for them could leave you in the red.

Here are some typical carrying costs to account for:

  • Interest: Fix-and-flip loans often have higher interest rates than conventional mortgages, although this varies. If you're working with a hard money lender (a private lender that requires real estate as collateral), expect to pay between 8% and 15% in interest. For comparison, a traditional 30-year term mortgage had an average annual percentage rate (APR) of 3.1% at the end of 2021.
  • Utilities: You'll need to budget for utilities between the time you purchase the home and sell it. Standard utilities to account for include water, electricity, gas and trash removal. Consider reaching out to local utility companies individually for an estimate of utility costs in your property's region.
  • Taxes: You'll need to factor property taxes, which vary region to region, into your budget. You'll also typically be required to pay short-term capital gains taxes for a home flip, which are taxed as ordinary income.
  • Insurance: Many lenders require you to purchase insurance to qualify for funding. For example, you may be required to purchase builder's risk policy insurance, which covers properties that are vacant and undergoing renovations.
  • Homeowners association (HOA) fees: If the home you purchase is in a neighborhood with an HOA, you'll need to pay fees either monthly or quarterly.

Selling Costs

When it comes time to sell, you'll need to pay marketing and selling costs. If you work with a real estate agent to sell your property, you'll commonly pay a commission of about 6% of the home's sale price, which covers the selling agent's marketing services as well as the buying agent's commission.

If you choose to list the home as for sale by owner, you'll need to budget for marketing expenses like listing your property on the multiple listing service, hiring a stager and a photographer, and producing printed materials.

You may also need to budget for other closing costs such as title fees, escrow fees and recording fees depending on negotiations with the buyer.

Lenders That Offer Loans to Flip a House

When seeking financing for your home flip project, you have several options:

  • Banks and credit unions: Large banks, credit unions and other financial institutions offer conventional mortgages, home equity loans and, in some cases, investment loans for applicants with good credit. Due to various limitations, conventional mortgages are not typically good options for those looking to buy a home to flip.
  • Hard money lenders, also called asset lenders or rehab lenders: These private lenders or investment groups lend cash for short-term real estate investments including home flipping, and typically use the investment property as collateral on the loan.
  • Peer-to-peer lenders: These online investors inject capital in your project through crowdfunding marketplaces in exchange for interest, a share of your profits, or both.

Types of Loans for Flipping Houses

Investors often fund home flips using loans intended specifically for home rehabilitation and flipping. Here are four types of loans you may be able to use to finance your flip:

1. Home Equity Line of Credit or Home Equity Loan

A home equity line of credit (HELOC) or home equity loan allows you to tap into the equity you've built in your primary residence (if you have one) to finance a fix-and-flip project. While both HELOCs and home equity loans allow you to borrow against the equity you have in your house, they differ in a couple of key ways.

HELOCs work like credit cards, where you have access to a revolving line of credit and can tap into it as needed and then pay down your balance. You only accrue interest on the balance you owe.

Home equity loans work like installment loans, where you receive your cash upfront and then pay a fixed monthly payment to pay it back

Home equity loans and HELOCs offer interest rates as low as 3% to 5% for borrowers with good credit. While these low rates can make your home flip more profitable overall, keep in mind that it's risky to use your primary residence as collateral. If you default on your loan, your home could be foreclosed on.

2. Hard Money Loan

A hard money loan is typically a short-term loan that comes from a private lender and uses a piece of real estate for collateral. They're a popular choice for flips because they don't require excellent credit or high income, and because they can be obtained relatively quickly. Hard money lenders look at a property's potential for equity to determine whether it's likely to be a profitable investment, rather than at your credit score as a borrower.

The major drawbacks to working with hard money lenders are high interest rates and origination fees. Expect to pay at least 8% to 12% or more in interest and a loan origination fee of about 3% to 4% of the home's purchase price. And as with HELOCs and home equity loans, the property you use as collateral could be forfeited if you default on the loan.

3. Personal Loan

Personal loans are straightforward and flexible enough to use for home renovations, and it's possible to use one to partially fund your flipping project.

If you have good credit and a low debt-to-income ratio, you may be able to qualify for a personal loan up to $100,000. As of the third quarter of 2021, the average interest rate on a 24-month personal loan was 9.39%, according to the Federal Reserve. But if your credit score is low, you may struggle to qualify for a personal loan, or may be offered a loan with a prohibitively expensive interest rate.

4. Peer-to-Peer Lending

Peer-to-peer lending, or crowdfunding, is a relatively new way to finance a home flip where investors pool money together to fund your flip. You can connect with real estate crowdfunders via platforms like Fund That Flip and Realtyshares, where you'll have to pitch your project as a viable investment to attract funders.

The drawback to peer-to-peer lending is that you'll typically pay your lenders interest ranging from about 8% to 14%. In some cases, you'll also pay an origination fee to the crowdfunding platform.

The Bottom Line

While house flipping can be lucrative, it's also risky and requires a large amount of capital and, typically, an investment loan. Rather than rushing into real estate investing, it's a good idea to be patient and do a substantial amount of research before you plunge into these risky investments.

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