The first house flip is the most mentally tasking because the steps, even if well defined, seem so new and daunting. On the checklist for flipping the first house are things like finding properties, making offers, negotiating with contractors and Real Estate agents and finally selling the property. In all of this the largest worry is usually the cost and money required. We have more on this in our beginners guide post.
The source capital or initial investment is needed in order to purchase the property and perform repairs to it. If you have investors they will share in the investment and split the profits too. To get started it’s all about the money.
But how do we find this money?
The thought here is to use your own money and credit to purchase a house and flip it but this places all of the risk and requirements on you. Of course you also reap all of the profits too. A more efficient method is to raise capital or find sources of money to invest in your project and then you split the profits based on the investors involvement and the work you perform.
The primary purpose here is to find sources of money to invest in your project and then make them a profit. When you make someone money they usually are happy to re-invest with you again on a later or larger project and so on. This process is not only about raising capital it’s also about finding investors that you want to work with. You will be pre-qualifying the investor to see if they are someone you want to work with and make money together.
Prepare
You should be knowledgeable and ready to explain things to a potential investor as well as answer their questions on the investment and expected returns. This includes learning how hard money loans work and understanding the full costs, interest, payments and outlining the project down to the contractors that will be working on it. Most pro flippers will also recommend that you already have a deal prepared with all of the numbers figured out and documented for them.
Understand how you can structure this deal whether its with a single active or passive partner or a hard money lender. A partner may not want to invest their time in the project but they trust you to complete it and return a profit. In this case they may provide more of the financial needs and you provide the sweat equity to complete the work.
Hard money lenders are more interested in the payments and interest returned than the property. Having a better understanding of their position can help when you negotiate for the first time. Be prepare with numbers and a rough schedule as to how payments will be made.
What About Self Funding
The first place to look is if you can provide the funding yourself and retain all or most of the profits. It’s a good idea to look into and list the options available to you as well as the amount you can bring to the table. If these numbers are low or zero, these numbers will give you a starting point when discussing flipping a house.
Here are a few options where you might find money to fund that first flip:
- Traditional Bank Loan
- Self Directed IRA (SDIRA)
- Crowdfunding
- Unsecured Loans
- Credit Cards
- Home Equity Line of Credit (HELOC)
If this is not enough to fund that first flip you can use these numbers to discuss with an investor and partner up.
Networking
Every Real Estate investor will talk about networking with other professionals, investors and real estate agents. Networking is very important when trying to find money to fund your next flip and key to a successful project. How does one network?
Start by joining a local real estate group so you can discuss the local market and meet with other like minded people as well as real estate agents. These connections can lead to some very useful resources and deals that you can be a part of.
Take advantage of other networking opportunities where high net worth individuals frequent. Some online ideas are social networking as well as discussion groups for investing. You can also find private investors with:
- Doctors
- Dentists
- Lawyers
- Company Executives
- Small Business Owners
You should also discuss real estate with friends and family at casual events to see what their responses and questions are. These are opportunities to develop answers to common questions and be more prepared for the real thing later.
Private & Hard Money
Private money is just that, it is provided by a private individual and you negotiate a deal for how much they profit based on the amount and their intended involvement. One suggestion I found interesting is to put in your own money (lets say $5000) and then go to the investor only for draws when needed. The investor does not need to write a large check and it shows that you are serious with your own money involved,
Another technique is to increase the profit to the investor for the first deal so it is better for them, eventually everyone can be switched to just interest returns. The first flips are tough as you need to develop trust first and a profit.
The hard money loans have been discussed in this blog. The hard money lender will loan money for a fix and flip but not usually the full amount. You will need to provide some of the investment in order to get the loan and you will make interest payments during the flip.
Finding Investors
Along with our networking how else can we find investors for flipping houses. I find that there is a common statement where you find the deal first and the money will find you. This is not always the case and therefore we need to find the money and develop the deal.
Family
Family is the first place to look because some family’s have that rich uncle willing to throw in for family’s sake. If you’re good at negotiating with family members you may be able to put together 3 or 4 small investors, combine this with your own money and fund that first flip.
Sometimes family will not be interested in the first flip but after you are successful the first time they may be calling you about the 2nd flip. Letting them know that this is what your doing can also bring in some 3rd parties that family members speak with often.
Friends
I find that friends can be a great source for advice and feedback on your deal or the pitch. Even if they are not interested to invest you can test your pitch and field questions from friends. In some cases you could find a partner to work with you or someone with money can become the money side of the business.
A second point of view can point out flaws in planning or spark new ideas and motivation. Friends that happen to be skilled at contractor work can also save time and money when planning your first project.
Professional
Co-workers can be another source for finding money to invest. Many managers and executives are looking for investments just like any other profession. Discussing real estate investments during lunch or before a meeting could spark some interest and then you can pitch a deal or gauge them for how much they would consider investing.
You can also speak to doctors, dentists and lawyers where you find them. Or just go visit one of their exciting conferences. I would prefer to play some golf instead.
Investors in the professional arena are usually more interested in the return on investment as opposed to partnering. They would prefer to reap the financial rewards as they understand there are tax and cash flow benefits in owning real estate but they are not interested in managing it.
Social Media
Social media such as facebook and linkedin can provide access to potential investors. Look into joining Linked in groups to network with other real estate investors or groups that are interested in finding investments. Facebook is another source of connection with people and their money.