- March 17, 2022
- Posted by General Electric Credit Union
- 3 read
House Flipping 101: A Guide to Investment Property Loans
Home renovation TV shows popularized the concept of house flipping, and many people are trying to get in on the game. If you’re interested in purchasing a property to renovate and sell, you’ll need the funds to make it happen. One of the best ways to secure capital is by applying for an investment property loan. Learn more about this viable option and how it can get your flipping business off the ground.
How do house-flipping loans work?
First, let’s define what an investment property even is. In real estate, this term is used to describe a property purchased with the goal of earning a return. This could be through rental income or sale proceeds. Many house flippers take the money they earn from a sale and reinvest it back into the next project. But before you can purchase your first property, you’ll need the capital.
There are several house-flipping funding options, some of which fall under the mortgage umbrella. While the average mortgage loan term is 30 years, house-flipping loans are typically more short term. Generally, they also require a higher minimum down payment of up to 25% depending on factors like your creditworthiness.1
What steps should I take before applying?
A lender will look at many of the same factors as they would if you were applying for a standard mortgage loan. This includes: your credit score and report, debt-to-income-ratio, and your credit utilization rate – which lenders use to measure how dependent you are on credit.
Access your credit report online to take the pulse of your current credit health. You’ll have the opportunity to spot and report discrepancies. As well, you can view your credit score and determine if there’s room for improvement. It’s wise to work on your credit score prior to applying for a mortgage loan, as a good score opens the door to better rates.
What am I getting into?
While some people may try to sell the concept of flipping houses as an easy way to make money, nothing could be further from the truth. Like all opportunities, flipping isn’t without risk. The goal is to complete renovations that increase a property’s value, so you’re likely not going to buy a turnkey home. Instead, you’ll probably put in offers for fixer uppers that need both cosmetic and structural updates – the latter of which could include some hidden issues you discover after closing. It’s wise to be proactive and prepare for the unknown. Include a 10% contingency in your renovation budget.
Several factors also affect a homebuyer’s desire or ability to purchase in your area. One is interest rates. While the market in 2020 and 2021 boomed thanks to low interest rates, current predictions are that rates will go up in 2022.2 This will make purchasing a home more expensive and could lower your available pool of potential buyers.
Location is another crucial aspect of flipping. Location can often make or break a sale depending on its desirability. For example, proximity to good schools, nice grocery stores and shopping centers, or metropolitan areas all increase desirability. As well, the health of a city’s economy is a common consideration for buyers. Is the area up and coming? Or, do buyers think an area’s best days are behind it? Take the temperature of a neighborhood before investing in it.
As a whole, it’s best to develop an accurate budget and timeline for the project that factors in all of the above. Doing so will increase your potential profit from the investment. Keep in mind your projections may change based on several elements, including whether you’re completing renovations yourself (properly and up to code) or hiring a contractor. If you’re financing a property, you’ll also need to maintain the loan payments until the property sells. Include these payments in calculations to ensure you can satisfy your obligation as a borrower. Selling the property will also accrue costs such as the real estate agent’s commission. Keep these costs on your radar to avoid surprises.
Have you made the informed decision to start a house flipping business? If so, you may be investigating funding opportunities. GECU is your best option for investment property loans because we’re a part of the communities you’ll be operating in. We understand the local housing market and are familiar with neighborhoods in Cincinnati, Kentucky, and Indiana. And as a Credit Union member, you’ll enjoy access to robust digital banking tools and competitive rates. Verify your eligibility here, then request more information about mortgage loans online. We can’t wait to work with you!