A short overview
For investors who are looking to get into real estate but are facing a tight budget, we’ve got some great news! There are a variety of options for you to get financing, and you can still get into house flipping. Keep reading as we go into detail about how to flip houses with other people’s money.
Those are who are new to real estate investing might be put off by the amount of money it looks like you’ll need to start investing. However, there are other options for people to get into real estate investing, particularly the house flipping business, that don’t involve breaking the bank. These methods involve flipping houses using other people’s money, and this isn’t as nearly difficult as it may sound. Let’s take a closer look at how to flip houses with other people’s money.
What is OPM in real estate?
Quite simply, OPM in real estate refers to Other People’s Money. The concept is centred around allowing people to achieve their real estate dreams, by using other people’s money to invest. Investors can even increase the Return On Investment (ROI) on their property by using OPM.
Benefits of OPM:
- Frees up more of your money
- You can spread the money you have across a few assets instead of investing it in just one property
- Allows those who wouldn’t otherwise be able to, to get into the real estate investing world
How to flip houses with other people's money
Now that we’ve established that using other people’s money is an option for investors to do fix and flip projects, let’s look at the different ways to do this.
Method 1 – Hard Money Loans
Hard money loans offer investors the chance to get access to funds for their fix and flip projects quickly and easily using OPM. Hard money loans work via a private lender, either a company or an individual. These are typically short-term loans with higher interest rates, but less stringent lending criteria.
Companies like New Silver even offer conditional loan approval within minutes, and funding in as little as 5 days. Fix and flip hard money loans often include funding for the purchase of the property, as well as the renovation. So, these loans can be larger than anything a traditional lending institution would offer. Whether you’re new to investing or an experienced investor, hard money loans are a great solution for fix and flip projects due to their short-term nature and quick funding.
Method 2 - Private Money Lenders
Private money lenders are people who’d like to invest in projects. These lenders can be family or friends, or they can be individuals who have disposable income that they’d like to make use of. The benefit of borrowing money this way is that you can have a lot more say in the loan terms, particularly if the loan is with someone you know. It’s likely that the interest rate will still be higher (often between 6% and 12%), as this will need to be enough to make it worth their while, however it’s still a good option for those who don’t have the funds, to get into flipping houses.
In the same vein as hard money loans, private lending also offers investors the chance to get quick access to funds and to get approval easier. Most private lenders will require some form of insurance, which is usually a promissory note, some require more however, but this depends on the lender themselves.
Method 3 – Crowdfunding
Another way to use other people’s money to fund your house flipping deal is via crowdfunding. Crowdfunding is a creative financing solution for those who want to achieve their real estate investing goals but don’t have the funds to begin and can’t or don’t want to go the traditional mortgage route. How does crowdfunding work?
Basically, a group of people online come together and invest in the project, with the idea being that various small investments will add up eventually and cover the amount that is needed. Through crowdfunding you’re essentially using a group of people’s money via an online platform. There are various crowdfunding websites that you can use to get the money you need, and through these, investors can capitalize on real estate opportunities that they might not have been able to before.
Method 4 – Wholesaling
Real estate wholesalers will find great real estate deals, secure them, and sell them on to other real estate investors for a higher price. Wholesalers typically don’t buy the property, but instead they research and find the best deals, then pass them off to other investors, and make a small profit on the deal for their services.
Getting into wholesaling therefore means that you don’t have to purchase the property itself, instead you can make money on the difference between the contracted sales price with the seller and the price agreed upon with the buyer. Wholesalers can charge a premium for their service because they’re basically doing the heavy lifting for real estate investors.
Method 5 – Partnerships
Another option to consider is partnering with other fix and flip investors who have the funds ready and available to purchase properties and flip them. This way, you can also learn and grow, while you partner with them for funding. It’s a useful solution for those who are new to real estate investing and need to get a foot in the door, both financially and with someone who is experienced.
In order to make a partnership like this successful, you’ll need to bring something to the table as well, so make sure that your contribution is valuable enough to make another house flipper want to partner with you. This could work particularly well for people who’d like to invest in real estate but don’t have the time to be active in the house flip itself.
Method 6 – Seller financing
One of the more unconventional methods of using other people’s money to purchase a house is through seller financing (also called owner financing). It’s another creative financing option that allows investors to use someone else’s money. Seller financing is essentially the seller holding onto the note of purchase for the property, and the buyer paying them a monthly instalment until the note has been paid off. In other words, the seller acts like the bank in this transaction and is effectively the lender.
For fix and flip properties this can be a useful tool because it’s usually a short-term loan with the expectation that the buyer will pay the loan off within a few years. Flipping projects are regularly finished within this time frame which means that the seller can be paid back in full as soon as the house is sold to another buyer after the project is completed.
Advantages of using other people’s money to flip houses
- Using other people’s money gives new investors a way to enter the real estate game, even if they don’t have the funds. Once the first property is flipped, they can pay back the funds and continue their journey from there.
- Investors who don’t qualify for traditional loans can use other people’s money for their flipping projects, which means that they have access to the real estate industry in a way that they might not have had before.
- The risk is shared between you (the investor) and the person or company that has funded you.
- You can leverage other people’s money instead of having to use your own.
- Some of the methods to get finance using OPM are with investors who are hands-off, so you’d have free reign on the project.
- Some OPM options offer 100% financing which can be almost impossible to get via other methods.
- There are typically less stringent lending criteria using OPM.
- Payment structures can be more flexible.
- Approval is quicker and invariably funding is too, so you can capitalize on any real estate deals you might find and beat the competition.
Disadvantages of using other people’s money to flip houses
- Preference may be given to investors who have more experience because there’s a higher risk for lenders who fund projects with new investors.
- There are typically higher interest rates when using OPM, and fees can be charged.
- Finding investors this way can be more challenging, particularly for those who have less house flipping experience and therefore no track record to show.
- The loan terms on OPM are usually shorter than other loans, so these will need to be paid back much quicker which puts pressure on investors to make sure that the deal works out.
- You’ll need an exit strategy for each deal and a plan B for what happens if the deal fails.
- Certain lenders may require a large percentage of the profits of the house flipping deal, which leaves you with less.
- Communication is important, and OPM options typically involve an investor having to communicate very well with the lender that they have chosen.
Do you need to put down a deposit when using OPM?
Some OPM methods may require a deposit, to show that you have some skin in the game and are therefore taking it seriously enough. This depends on the OPM method that you choose, however, because there are no hard and fast rules when it comes to using OPM for your house flipping project. It’s advisable to discuss with the lender that you’ve chosen, ahead of time, to find out what their expectations are in terms of a deposit.
How to find the right partner for real estate investments
Finding the right partner for your real estate investing journey depends on your goals and objectives. You’ll need to ask yourself how quickly you need funding, what kind of interest rates you can work with, how long you’ll need to pay off the loan and how much you need.
If you’re looking to get the best fix and flip deal, you’ll need access to funding quickly so that you can beat the competition and jump on good deals when you see them. If you’re looking for a funding option that gives you the funds for both the purchase and the renovation, you’ll need a loan large enough to cover this.
Hard money loans offer all of the above advantages and more, with a quick approval process, higher loan amounts and low barriers to entry, they’re one of the most popular ways to lend. New Silver is a hard money lender that offers not only a fix and flip loan of up to $5,000,000, but also loan terms of up to 24 months and up to 100% construction financing. New Silver’s fast funding is hard to beat, with funds being paid out in as little as 5 days after loan approval.
Using other people’s money for your house flipping projects can be a great tool, however it will involve being savvy and creative with your financing so that you come out making a good profit. You can start by building your network and creating a circle of people in the real estate industry who could be instrumental to the process. From there, you should outline your goals and objectives, then look for the right financing method to suit you.