Over the past three years, home flipping has regained its popularity as real estate investors started dipping their toes into the market. It’s no surprise that home flipping was at an 11-year high in 2017, according to Attom Data Solutions, a property database curator. It said $16.1 billion went toward the purchase of homes for flipping that year.
As a real estate investor, knowing how to get a loan for an investment property can be a big deal. It can mean the difference between success and failure. If you’re interested in expanding your real estate empire — whether you’re flipping houses or using an investment property to generate regular cash flow as a landlord — it’s important to understand your options.
Here are seven options to consider for funding your investment property purchase or upgrade.
1. Home improvement loan
For the most part, getting a home improvement loan makes sense if you’re upgrading something you’ll keep for the long term.
“The only way I see it working is if this is your one project for the year,” said Sam Wilson, a real estate investor and co-owner of Southern Home Buyers.
Home improvement loans also can be useful for income-producing properties. If you rent out properties that you’ve had for a while, you might have enough equity to get a loan based on the rental property’s value. However, if you borrow too much or lose a tenant and can’t cover the payment, you could end up losing your property.
Wilson pointed out that a home improvement loan can come with perks, such as a lower interest rate, but the drawback is it takes time to get through the system.
“Do you have 30 days to wait around for the bank to underwrite you, appraise the property, and get it through their loan department?” he asked.
If you’re working within a short time frame, you might not have time to take advantage of a home improvement loan. You’ll need to find other solutions.
For those who can afford to wait for the process to play out, a home improvement loan can be helpful, Wilson thinks. It might not be the best option if you need to complete a project quickly so you can flip the house, or if you have a small window of time before a new tenant moves in.
2. Home equity line of credit
Rather than relying on getting a new home improvement loan, Wilson suggested people use an existing home equity line of credit.
“If you have a home equity line of credit on your primary residence, you could utilize it as soon as you need it,” Wilson said. “There are no completion hurdles to overcome for more funds, and no waiting around for projects to start.”
Having that capital available at a relatively low interest rate is a huge advantage. Because the line of credit is based on your primary residence, you don’t have to worry as much about the difficulties that come with trying to persuade a bank to fund an upgrade if you’ve invested in a fixer-upper.
As with a home improvement loan, it’s possible to get a line of credit based on your long-term investment property. If you have enough equity built up in an existing rental property, you can use it for collateral instead of relying on your primary residence.
“With a true investment project, like a home you’ve bought cheap but needs lots of work, it’s going to be in such a condition that most banks won’t lend on it beyond its current value anyway,” said Wilson. “That can make getting a home improvement loan impractical for any real estate investor.”
The downside to using a home equity line of credit from your primary residence or your rental property is that you are putting your investment at risk. If something goes wrong and you can’t make payments, you could lose your home or your income-generating property.
3. Cash-out refinance
Looking for a way to get more out of your existing equity? A cash-out refinance can be one way to get the money you need.
Refinancing your home or rental property could result in a lower interest rate and payment. Also, with a cash-out refinance, you can increase your cash flow, based on the equity you have.
The downside is that, as with a home improvement loan, you’ll have to wait for the appraisal and underwriting process to work itself out. You might not have the time for that. Also, if your investment property doesn’t have enough equity to provide the funds you need, you’ll have to use the home you live in as the source of equity.
Using your primary residence for a cash-out refinance if you’re buying a property to flip can be risky. You could end up losing your home while being stuck with a fixer-upper that isn’t habitable.
4. Hard money lending
Many people focus on traditional bank lending when trying to figure out how to get a loan for an investment property, according to Lucas Machado, a real estate investor and the president of house-flipping startup House Heroes.
Instead, he pointed out, many real estate investors turn to more creative home loan solutions such as hard money lending.
“This is used a lot by investors who flip homes,” said Machado. “The investor borrows from private individuals or businesses to fund their real estate investments.”
These nontraditional loans often are higher than the current value of the home, so there’s money left over to make upgrades that enable investors to sell the home quickly. The hope is that the home sells for much more than its purchase price after the improvements are made. The loan can be paid off and the investor has a little capital left over so they can move on to the next project.
With hard money lending, though, Machado explained that you usually need to bring some of your own capital, typically a 20% down payment. You probably will pay a higher interest rate because hard money lenders put their own finances on the line. Also, many of these alternative mortgage lenders have provisions that allow them to repossess the home if you don’t make payments on the loan.
Do you know people who have a lot of capital available? If so, you could enter into a partnership with them to get the money you need.
“One common form of partnership for real estate investing is when one partner supplies the funding and the other brings the opportunities,” said Machado. “The partners then split the profit upon completion of the project.”
This option also might work if one partner has very good credit and can secure a loan, while the second partner manages other aspects of the investment. However, you need to come to an agreement with your partner to make this work. You both need to be happy with the distribution of profits in proportion to what you bring to the table.
6. Seller financing
If you’re buying a home, you might be able to convince the seller to finance the deal, Machado said.
“Even though the seller doesn’t make money at the time of the sale, they could receive the advantage of ongoing income while you pay off the loan,” he said. “However, you might have to pay a higher price for the home and pay a higher interest rate because they offer creative financing.”
When using seller financing, you run the risk of putting some money into the home to fix it up or bear some of the administrative costs that come with being a landlord. You could lose that money if you can’t make payments and the seller repossesses the home.
7. Personal loan
Is your home improvement project relatively small? You might benefit from an unsecured personal loan for home improvements. If you’re a real estate investor looking to make upgrades for tenants, you can get a personal loan fast and at a reasonable rate if you have good credit.
Personal loans don’t require an appraisal, and some lenders, such as Avant, can send the money to your account within a couple of business days. Borrow the amount you need to upgrade the home and move on to the next project.
Personal loans often are unsecured, so you don’t have to worry about losing the property. However, you might not qualify for a personal loan large enough to complete a total remodel, so the option might not make sense if you’re an investor trying to flip a fixer-upper.
How to get a loan for an investment property
No matter your situation, you need to present yourself as a good risk.
As you approach hard money lenders or work with a partner or seller for financing, you need to show that you’re smart and hard-working. You can get a loan for your investment property without having good credit, but you have to prove you have a plan to be profitable so that nontraditional lenders can have confidence in you.
If you’re considering a loan based on equity instead of a personal loan, it’s important to ensure you have enough value in your home to qualify for your desired amount. As a result, you could end up taking out a home equity loan on your primary residence. As Wilson pointed out, this can be a good way to access ready money, but you have to be careful that you don’t lose your home.
There are options for real estate investors looking for a little leverage to help increase profitability. Whether you need a home improvement loan to upgrade a revenue-producing rental property or you hope to buy a home to flip it, research your options and decide which one works best for you.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|