Cash is the most significant barrier to entry for most new real estate investors. Even when you borrow 80% of a home’s purchase price, that still leaves you coming up with $50,000 for a down payment on a $250,000 home, plus closing costs, renovation costs, or carrying costs. So, how do you flip houses with no money down? There are several options, ranging from wholesale deals to creative financing options, and we’ll talk about all of them here.
In this article, you’ll learn:
- Outside of traditional mortgages, house flippers have several options and methods for financing their project without little to no money down.
- The different methods for house flipping with no down payments offer distinct advantages and disadvantages.
- Before choosing a method, you must thoroughly study your financing options, risk tolerance, and overall real estate investment strategy.
First, What Is The 70% Flipper’s Rule?
Before we talk about how to flip houses with no money, we need to discuss this important rule, something everybody in real estate needs to know.
The 70% rule dictates that you shouldn’t buy any property for more than 70% of its after-repair value (AVR) minus all repair and renovation costs. This rule gives house flippers a little insurance in securing profits.
For example, you want to buy a house to flip, look around, see a potential property, do a thorough inspection, and decide that this thing could sell for $500,000 after you work on it. That’s your AVR.
During that inspection, you find that the property needs an insulation overhaul, minor aesthetic changes, and outside gutter replacements. A thorough estimate tells you you must spend $50,000 for the intended repairs.
So, you take 70% of the AVR, which is $350,000, and subtract $50,000 for the repairs, bringing us to $300,000. That makes $300,000 the ceiling for your offer. Paying anything above that amount might cut into your profits.
Knowing this rule is important before you try to start house flipping with no money down.
How to Flip Houses With No Money Down
People who want to get into house flipping are usually discouraged when they find out how much they need to shell out to get started. On top of paying for the property, you must put aside around 10% of the total value for repair, renovations, and sales expenses. So, yeah, real estate investments are easier with plenty of cash on hand.
Savvy investors know how to flip a house with no money down, even as they aim to build their investing capital to lower their risk.
Here’s a quick summary of the ways to house flip without tons of cash:
|Partnering with Investors
|Hard Money Loans
|Private Money Loans
|Credit Lines (HELOCs, etc.)
Option To Buy / Rent To Own
Partnering With Investors
One creative way to flip houses with no money down is to let someone else cough up the cash for you.
You find a real estate investing partner with money, and they cover the down payment for you. Of course, you must bring something to this partnership yourself, whether experience, labor, or a network of relevant personnel such as contractors and lenders.
There are plenty of investors with money but no time or experience with real estate investing who would love to act as a silent partner and earn strong returns. Just make sure you can deliver for them.
That said, you need to realize that you will lose some control over the decisions, as your partner needs to be involved. Profits are also divided two ways. Lastly, while rich investors can help you get started, this partnership requires trust.
Hard Money Lender
House flippers know what hard money loans are. But just for a refresher, hard money loans are short-term, collateral-based arrangements from institutions specializing in real estate loans. Unlike traditional loan terms, the value and approval of hard money loans are based on the value of the property or hard asset.
The short-term arrangement also fits well with your goals, as it usually takes four to six months to flip a house.
The great thing about hard money lenders is that they only partially depend on credit scores or other creditworthiness factors to approve your loan. If you’re an experienced house flipper, have a great prospective asset to flip, or if you can dazzle them with presentation and make the numbers work, you might get approved.
However, hard money lenders often have high interest rates (8-15%). Furthermore, depending on your agreement, they ask for a sizable downpayment—between 20-35% of the property’s current or after-repair value. It’s not exactly house flipping with no money, but the good thing is you can use other financing methods to cover that downpayment, like—
Private Money Lender
Private money loans are loans that you get from—you guessed it!—private individuals. Anybody from your sister to that one rich guy you met at that real estate conference can count as a private money lender.
The good thing about private money loans is their utter flexibility, making them a great option to flip houses with no money down. Interest rates, down payments, loan terms, what you do with the money—everything is up for discussion. It doesn’t matter if you have little money and bad credit as long as the private lender trusts you enough.
Of course, it comes with some downsides. Private lenders aren’t regulated; though it might be true that you can have lower interests, they can just as easily charge you cut-throat rates if your need is bad enough.
Home Equity Credit Lines
Another way to flip a house with no money down is by borrowing the down payment from a rotating credit line.
That could mean a home equity line of credit (HELOC), a business credit line, or business credit cards. Check out Figure for a five-day settlement for HELOCs against either your primary residence or an investment property. Alternatively, try Fund & Grow as a business credit concierge service to help you maximize your unsecured business credit lines as a real estate investor.
You can avoid cash advance fees using credit cards by using a service like Plastiq.
Remember that conventional mortgage lenders don’t allow any part of the down payment to be borrowed. The good news is some hard money lenders and portfolio lenders, such as Visio and Kiavi, allow it. All these options offer you more flexible ways to flip houses.
When you wholesale real estate deals, you never actually take title to the property. Instead, you flip the contract to buy a property.
It works like this: You find a great deal on a property, put it under contract, and then find another buyer to buy the property. You mark the contract up, taking a deal finder fee.
For example, you find a homeowner with a $300,000 property in foreclosure. You offer to buy it for $220,000 with a 10-day settlement, then sell the contract for $230,000 to another real estate investor you know.
The distressed homeowner gets a fast settlement, the investor gets a $300,000 property for $230,000, and you get a $10,000 finder’s fee without ever having to own any real estate.
Since you never take title, you never have to pay for the property. All you put down is a small earnest money deposit, which you receive back at settlement.
The seller often never even cashes the check; they hold it. That makes wholesaling an ideal starting point for novice investors looking to flip a house with no money down.
While simple conceptually and can be a great way to flip houses with no money down, the execution takes hard work. Read up on how to wholesale properties successfully before committing to this strategy.
Do a Live-In Flip
Alternatively, you could buy the house, move in, and flip it yourself over the next year or two.
Doing so comes with several huge advantages. First, you can take out an owner-occupied mortgage, with down payments as low as 0% through USDA or VA loans or 3% through Fannie Mae’s HomeReady program.
As a bonus, you can borrow at extremely low interest rates as a homebuyer. Check today’s interest rates on Credible.
Second, you pay the lower long-term capital gains tax rate on your profits if you live there for at least a year. Or better yet, pay no capital gains taxes at all on your first $250,000 of profits if you live there for at least two years, with the homeowner exemption ($500,000 if you’re married).
And, of course, you can avoid paying a contractor if you do the repairs yourself.
If you want a standard conforming mortgage that doesn’t include funds for renovating the property, it must be habitable and only need cosmetic updates. Alternatively, you can use FHA’s 203K loan program or Fannie Mae’s HomeStyle renovation loan program (which you can use in conjunction with their HomeReady program for a low down payment).
Remember that homeowner mortgages require you to live in the home for at least one year before moving out. After a year, you can either sell the house as a flip or keep it as a rental property and potentially refinance it to pull your original down payment back out; this is what’s known as the BRRRR strategy.
Alternatively, you can borrow the money to buy the property from the seller through owner financing.
Seller financing is when the property seller provides a loan to the prospective buyer to purchase the property. It’s similar to private money loans in that the terms can be extremely flexible and potentially do away with down payments altogether.
While that solves the problem of how to flip a house with no money down, it doesn’t cover your renovation costs. Those you’ll still need to cover either with cash or by borrowing money from elsewhere, such as credit cards or a HELOC.
The seller isn’t the only private party that can finance your deal. Another form of creative financing to flip houses with no money down involves raising money from other people you know and signing private notes with them.
A promissory note is a legal commitment to repay a loan. When you borrow money from an individual, such as a friend or family member, you sign a promissory note to pay them back.
You pay them interest as negotiated, and they may or may not require a mortgage or deed of trust recorded to create a lien against the property. It makes for a flexible form of financing, often with few or no loan points charged.
Still, be careful when borrowing private notes from friends and family. You risk more than just money and should establish a track record of success before putting your relationships on the line.
Crowdfunding has become much more popular these days, and platforms like Fundrise, Groundfloor, RealityMogul, and Yieldstreet make it easier to flip houses with no money down.
The crowdfunding method is similar to private notes in that investors band together to give you the money you need for flipping homes. However, the difference between the two is private notes are usually done directly between the lender and borrower.
Crowdfunding platforms do away with all that, opting to do everything through their real estate market platforms.
Such platforms can also provide loans for bigger fix and flip projects. The better you are at it, the more successful projects you add, and the more investors will want to invest in your efforts.
However, meeting investor expectations can be harder, leading to more stress and pressure. And, since you’ll be working with many people, your bottom line may take a big hit.
Option To Buy / Rent To Own
While not strictly an option to flip a house with no money, looking for rent-to-own properties or an “option to buy” can be an effective method for newbies and experienced real estate investors.
With option-to-buy arrangements, the final price for the property is negotiated before the contract is drafted. The negotiation can include discussions about future renovations, needed repairs, and other important details, which can impact the final price. This is done so that the owner and the investor are on the same page about the plans for the property.
Once the discussions are done, the final price is locked in. Rent is then considered a partial payment to be subtracted from the final price. The contract usually lasts one to three years, after which the buyer must be able to produce the full purchase price or cover it entirely through rent payments. Rent-to-own arrangements may need you to stay as a tenant, while the option to buy doesn’t have that restriction.
What To Consider When Looking For Ways To Start Flipping Houses Without Money Down
Before you make your choice, you need to consider these important factors:
Assess the financial risks, like the possibility of default or profit sharing.
Control and Decision-Making
Consider the level of control you’ll have in the process, especially if partnering with investors.
Understand obligations such as interest rates, down payments, and profit-sharing arrangements.
Access to Capital
Evaluate how much capital each option can provide and its adequacy for purchase and renovation.
Expertise and Experience
Reflect on your real estate expertise, necessary for options requiring market knowledge or negotiation skills.
Legal and Regulatory Requirements
Be aware of the legal and regulatory implications of each financing option.
Network and Relationships
Leverage your personal and professional networks, which are essential for options like private loans or finding partners.
Market Knowledge and Research
Conduct market research to understand feasibility and profitability in your target market.
Long-Term Goals and Strategy
Choose an option that aligns with your long-term investment goals, whether for quick returns or portfolio building.
Flexibility and Timeline
Some options offer more flexibility and require different investment timelines. Choose one that fits your schedule and financial plans.
Potential for Profit and Growth
Consider each method’s potential for profit and growth, balancing it against associated risks.
Personal Commitment and Involvement
Evaluate the amount of personal time and involvement required, as some strategies may demand more hands-on engagement than others.
Final Thoughts on Flipping Houses With No Money Down
House flipping with no money down is not only possible, but also feasible in some circumstances. However, if you have very little cash but want to start flipping real estate, consider land investing instead.
You can start investing in real estate with under $1,000, avoiding the need to borrow any money at all. Land investing also requires no renovation and almost no carrying costs if you buy in cash.
You can take on larger projects as you build capital for real estate investing. But start small, and be careful not to overleverage yourself. If you’ve only completed a few deals or no deals, avoid borrowing the down payment when choosing to flip houses with no money.
Stick with wholesaling deals, working with experienced and wealthier partners, or flipping land in cash. In no time, you’ll build your capital to flip houses without overborrowing.♦
Which tactics have you explored for how to flip a house with no money down? What’s worked well for you, and what hasn’t?