Did you hear the story about the millionaire real estate investor who had no cash at stake in the first fix and flip? It might sound too good to be true, but some creative investment strategies could allow you to break into real estate rehabs with little money to start.
Use Your Existing Home Equity
If your home is worth more than the original mortgage, a cash-out refinance may give you the funds you need to get started. When you refinance for a value higher than what you currently owe, you get the difference between the old loan amount and the new mortgage in cash. The lender will typically require good credit history, but if you have built substantial equity into your property, this could be a lucrative solution.
Instead of receiving a sizable cash sum that carries interest right away, another option that uses the value of your house is a home equity line of credit. You can borrow up to a limit based on your property value, but only as you need it. You typically won’t have to pay the interest on the money until you withdraw it.
Borrow Against Your 401k
If you work for a company that includes a 401k plan, it might give you an option to borrow a percentage against your investment. Generally, you would repay the loan in fixed amounts over a set time, and since you’re borrowing from yourself, you pay the interest back to yourself. Keep in mind, if you leave your job, the balance will likely be due immediately.
Finance With a Bridge Loan
With a solid plan and a quick timetable, you could avoid putting your assets on the line by applying for a commercial bridge loan. These loans tend to carry high-interest rates, but the term of the loan is generally a year or less. If you reasonably expect the sale of the fix and flip to pay off the loan balance, a bridge loan might make the most sense.
If your credit is not great or if you need fast financing, some individuals or companies issue hard money loans that function similarly to bridge loans, but usually with fewer restrictions. These are often ideal because the property value is the basis for the loan instead of the borrower’s creditworthiness. Depending on the lender, these loans could be issued within days, rather than weeks or months.
Just because you don’t have abundant cash reserves shouldn’t prevent you from jumping into a fix and flip. Know that you are not alone, and all it may take is a little research and some thinking outside the box to realize your dream.