Acquire the Funds: How to Finance Your House Flip
TLDRThe money you need depends on what the lender will fund: the purchase, the purchase plus repairs, or a share of the finished value. Compare that loan amount with the cost of your deal, then work out the cash you need to bring. Keep cash available to run the project, too.
Table of Contents
- Put the Deal in Front of the Funding
- Compare the Cash Gap
- Why After-Repair Value Changes the Math
- Private Lenders and Partners
- Keep Cash in the Business
- Apply It to Your Deal
Put the Deal in Front of the Funding
I introduce funding in The Foundation because the money question stops a lot of people before they even look at a house. Here in The Deal, you can put it against an actual property.
Start with the purchase price, the work the house needs, and what it should be worth when you’re done. Those numbers let you compare the money a lender will provide with the money the project needs.
Buying a home you’re going to live in is a different path. I cover that in the Foundation funding lesson. Here, we’re looking at funding an investment property.
Compare the Cash Gap
Take a $200,000 purchase with a $30,000 renovation. That’s $230,000 before the other costs of the deal.
In the lesson, I compare three ways to fund that same project:
| Funding example | How the loan is calculated | Loan amount | Cash gap before other costs |
|---|---|---|---|
| Bank loan on the purchase | 80% of the $200,000 purchase | $160,000 | $70,000 |
| Commercial bank loan on purchase and repairs | 80% of the $230,000 total | $184,000 | $46,000 |
| Hard money with a $300,000 finished value | 70% of the after-repair value | $210,000 | $20,000 |
In the first example, you bring $40,000 for the down payment and all $30,000 for the work. In the second, the loan also covers part of the rehab, so you bring $46,000 in total.
The third example looks at what the house will be worth after the repairs. That changes the cash gap again.
These percentages are examples from the lesson. Use the lender’s actual offer for your deal. The gap shown here covers only the purchase and rehab; it isn’t your final cash-to-close number or your full project budget.
Why After-Repair Value Changes the Math
After-repair value, or ARV, is what the house should be worth when the work is done.
Keep the purchase and renovation at $230,000, but change the ARV to $350,000. At the example’s 70%, the loan calculation becomes $245,000.
That’s $15,000 above the purchase and repair total. It’s why the quality of the deal matters so much to the funding question. A lower purchase price relative to the finished value can leave a smaller cash gap.
It doesn’t mean a lender will hand you that extra $15,000 at closing. The actual loan may cap what you can borrow, hold repair funds for later draws, and require cash for fees and reserves. Get those terms before counting the money as available.
Private Lenders and Partners
A private lender can lend you the money for an agreed return. You’re paying to borrow the money.
A partner takes a share in the deal. You might find the house, manage the contractors, and get it sold while the other person supplies the capital. The agreement sets how you share the result.
Those are different arrangements. Compare the borrowing cost with what you’d give up in a partnership. An experienced partner may also bring knowledge you don’t have yet.
I tend to prefer hard money because those lenders are already in the lending business. I don’t like the idea of someone learning on a first flip and immediately raising a fund from other people. I’m still capable of making mistakes. I’d rather carry the cost of my mistakes than put that weight on someone who trusted me with their money.
Keep Cash in the Business
I tried the all-cash approach. The problem was that if one project stalled, I was stuck waiting for it before I could move on.
Cash is the oil in the business. You need it to pay the bills and keep the work moving. Putting every available dollar into buying the house can leave you without enough to run the project.
Borrowing can leave more cash available. It also costs money. A lower loan rate may still require more of your cash, so compare both parts of the offer.
Apply It to Your Deal
Put the lender’s proposal beside your deal numbers. Check what the loan covers, how much cash you need to contribute, and when the repair money becomes available. Include the loan costs and the cash you’ll keep available while the work is underway.
If the funding leaves you short, that gap is part of the buying decision. It doesn’t disappear because the house has a good projected resale value.
Once you’ve worked out how the purchase and renovation will be funded, continue to Home Stretch for the work that leads up to closing.