The Real Truth About Flipping Houses With No Money Down
Some people say it's impossible to flip houses without using your own money. This statement can be true only if you make it that way. The fact remains, it's not just possible, but people do it every day. Flipping houses with little or no money of your own is not as hard as you may think. It's a challenge, but if you do your homework and calculate your risks. Making it happen is as simple as getting out of your comfort zone.
If you're new to the process and you're not sure how no money down works. It just boils down to using what's called an OPM approach or other people's money to bankroll your project entirely. Investors will lend you money for the purchase of the building including the renovation with the expectation of receiving a percentage of interest back from the money they've invested. There's an overwhelming number of places you can look the find investors for no money down but here's a quick break down to point you in the right direction.
Working With Partners:
One of the most accessible places to get your start with no money down is to work with a partner or someone you know that has money they can invest.
This list could also include a local business owner, a co-worker, a friend or relative, business associate, and even another real estate investor.
If those are not options for you and you can't think of anyone else immediately here are four other options you can consider.
- You can talk to your CPA. The thing with the CPA is they are centers of influence. So if the CPA themselves are not in a position to invest, they will likely know somebody that can.
- You can always talk with your doctor or dentist. They're usually invested in projects already since they're looking to grow their money.
- Your attorney is another option too, depending on what area of law they're working in, they will also have access to numerous people with business interests.
- The fourth one is a good one even though you may not know them very well. A person invested in the stock market understands the principle of wanting to grow their money and obtain a healthy return.
The most straightforward arrangement when looking for a partnership is to find a silent partner that will fund the project, and you do all the legwork. This could include overseeing all the renovations. Purchasing the materials and handling the contracting crew. An agreement of a 50/50 split is pretty universal in the scenario.
The investor will like the fact that they don't have to commit any of their time to the project, this can be a huge selling feature.
If you're new to this industry, the first temptation would be to partner up with somebody in your real estate investing business itself. What people find, is that these partnerships are complicated to manage. There are too many ways to disagree. It may seem to work on the first project but once you get two and three projects in people usually differ in opinion. My mentor told me you never want to have a partner with your entire business because you are doubling your liability and splitting your money in half. A good tip on flipping is you certainly want to find a partner on a case-by-case basis because each project can vary drastically. If you find you're continually going back to the same person over and over for funding, you could develop a possible partnership with your real estate business itself. But I would hold off on that getting started.
Utilizing A Hard Money Lender:
This option usually involves somebody willing to lend you money regardless of your credit, but it can be somewhat expensive.
This type of OPM lender can work well if you know your exit strategy with your project. If you know, you can flip the deal very quickly and get out fast. The hard money lender could be an excellent option for you. The reason for this is they're better for short-term loans, but if it drags out for an extended period, it can cost you an enormous amount.
So for example, if you were to borrow 100 grand from this type of lender with a 16% interest rate and you took six months to repay them. You could be looking at $8,000 in interest charges and even another $4000 if you had to pay it back at four Points. That's $12,000 total.
However, if you were able to flip a property inside of three months, then you would only pay $6,000 of interest rates. Hard money lending can work for you if you flip the properties quickly.
Working With Private Money Lenders:
Private money lenders are an excellent option for this type of investment. They are usually regular people with some disposable money looking to make it work for them. For example, I knew somebody that had sold their second home, and we're looking to downsize their primary residence. They knew they were going to take a beating if they left this money laying around and didn't put it to work them.
It's a widespread misconception people have thinking it will be a hard sell with a private money lender. Oftentimes though, the opposite is the truth. They usually understand money and don't want to have it's sitting idle. The other interesting thing to highlight is they're very open to listening to new ideas.
My experience, private money lenders are a far better option than hard money lenders because you can negotiate the interest rates with higher success.