How to Fund a House Flip Without Being Rich

TLDR

Banks lend on cost. Hard money and private money lend on value. That one difference is the reason most new flippers think they need $100,000 when they actually need closer to $20,000. Here are the five lender types and what each one requires you to bring.

Table of Contents

• The Example Deal We Will Walk Through
• Option 1: Cash
• Option 2: Conventional Mortgage
• Option 3: Commercial Bank Loan
• Option 4: Hard Money
• Option 5: Private Money
• Option 6: The Private Hard Money Lender
• How to Find These Lenders
• FAQ

The Example Deal We Will Walk Through

One deal, compared through every lender type. Numbers are simple on purpose.

The question for every lender is the same: how much of my own cash do I bring to the table?

Option 1: Cash

You need $260,000 in the bank. Most people do not have that. Skip.

Option 2: Conventional Mortgage

This is a Fannie Mae or Freddie Mac loan from a regular bank. Lowest interest rate you will see on any flip loan. Also the hardest loan to qualify for and the slowest to close.

The bank gives you 80% of the purchase price. Not 80% of the total cost. Just the purchase.

You also have to pass every bank test. Credit score, credit history, cash reserves, monthly income to cover the payment. And most house flips do not happen on the slow timeline of a conventional close. The house you want to buy is gone before your bank is done.

Conventional is fine for your primary home. It is a bad fit for flipping as an ongoing business.

Option 3: Commercial Bank Loan

Same bank, different product. Not backed by the government, so the bank is taking the risk. They still run you through every test and sometimes make them harder.

The upside is they lend on total cost, not just the purchase.

Still a lot of cash to bring every time. And the slow close is still a problem. Good product for established investors with repeat banking relationships. Not great for a first flip.

Common Mistake

Assuming a bank will treat your flip loan like your primary home loan. They will not. The product, the rate, the timeline, and the cash required are all different.

Option 4: Hard Money

Here is where the math changes. Hard money lenders do not lend on cost. They lend on after repair value.

Most hard money lenders give 65% to 75% of ARV. On our $350,000 ARV deal at 75%, that is $262,500.

Our total all-in cost was $260,000. The hard money loan covers the whole thing.

The catch is the price of the money.

That is a real cost. It shows up in your profit. But the tradeoff is you can do the deal with almost nothing out of pocket. If you close with full costs covered, you might only be out of pocket for that $10,000 of other costs, or even zero if the deal is strong enough.

Run the full picture on our example:

You made roughly $41,000 with very little of your own cash in the deal. That is the whole point of hard money.

Cash keeps its scaling power. The interest is the price you pay to keep your reserves intact.

Option 5: Private Money

Private money lenders are individuals. A rich uncle, an aunt, a friend from church, a neighbor with a 401K he is not touching. They lend you money usually on a handshake and a note.

Rates are usually better than hard money. Terms are whatever you work out. And they do not put you through the gauntlet the bank does.

The downside is the relationship risk. You are taking the money, you are taking the construction risk, and they are exposed to whatever goes wrong without always understanding it. If the deal goes sideways, you are explaining to your family why their retirement money is tied up in a house you cannot sell.

For a new flipper, I would not start here. Borrow from professionals first, then move to private money once you have a track record you can show with numbers.

Private money is cheap capital with expensive relationship risk.

Option 6: The Private Hard Money Lender

This is my favorite for a newer flipper. It is the cross between hard money and private money.

A private hard money lender is usually an experienced investor who is now lending out their own money or money from a small group of accredited investors. They specialize in lending to flippers. Many of them still flip themselves. They know the business inside and out.

What you get:

• Rates in the hard money range
• Terms that can flex with the deal
• A lender who actually understands what you are doing
• A built-in mentor who wants you to succeed

Why would they want you to succeed? Because if you fail, their money is tied up in a bad deal. Their business depends on finding flippers they can trust. You showing up prepared is exactly what they are looking for.

Pro Tip

A private hard money lender charges almost the same as a corporate hard money lender, but you get a real person on the phone who has done hundreds of flips. That relationship is worth more than the rate difference on any one deal.

How to Find These Lenders

You find them through networking. There is no other way.

• Local real estate investor meetups. Every city has one, usually monthly.
• Facebook groups for your local market, search “[your city] real estate investors”
• Ask every flipper you meet who funds their deals
• Go to a local REIA meeting, introduce yourself, say what you are working on

When you meet one, tell them you have been studying, show them a deal you underwrote, and ask what they look for in a borrower. Then bring them a real deal that fits their criteria. That is the whole game.

FAQ

What credit score do I need for hard money?

Most hard money lenders care more about the deal than your credit. Some want a 640 or better. A few do not check at all. What they really underwrite is the ARV, the rehab, and your experience. A strong deal can carry weaker credit.

How fast can hard money close?

Usually 7 to 14 days. Some lenders will close in under a week if the appraisal comes back quickly. That speed is the reason flippers use hard money even when they could qualify for a bank loan.

What is the difference between points and interest?

Points are a one-time fee at closing, calculated as a percentage of the loan. Interest is the monthly cost of keeping the money. Hard money typically has both. On a $262,500 loan at 3 points, you pay about $7,875 at closing plus monthly interest during the hold.

Can I really get into a flip with $0 out of pocket?

Yes, but only on a great deal. If you buy at a steep enough discount, the hard money loan at 75% of ARV can cover the purchase, the rehab, and the closing costs. The margin for error is thin. Most new flippers bring some cash their first couple of deals.

I am just starting out. Which lender should I use?

Start with a local private hard money lender you can meet in person. Rate will be reasonable, they will teach you as you go, and the closing will be fast. Save the conventional and commercial bank routes for later when you have a track record.