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The golden rule of house flipping states that entrepreneurs should never pay over 70% of a property’s value after subtracting the cost of renovations and associated fees. Known as the “70 Percent Rule,” it sets a standard for improving the chances of turning a profit even if unexpected financial challenges arise.
Few upstart house flippers have 70% tucked away. That’s why many look to lenders to secure the upfront cash necessary to complete a fix-and-flip project. But borrowing money from sometimes unconventional sources can be complicated. By understanding the pros and cons of financing a fix-and-flip, you can make savvy financial decisions.
The majority of loans for flipping houses set repayment terms between 6-18 months. One-year loans rank among the most commonly approved. Some loan products offer entrepreneurs relatively low-interest rates if they have a sound business plan, good credit score, cash-on-hand and assets to leverage. Some sources charge interest rates into the teens but typically set a lower qualification threshold. These rank among the more common resources house flippers access.
A wide range of borrowing options remains available to house flippers, largely because the industry continues to see substantial growth. In 2019, a reported 6.2% of homes sold were considered flips. That figure rose from 5.8% the previous year. However, the fact that fix-and-flip projects hovered at an 8-year high in 2019 doesn’t necessarily mean newcomers should take out hefty loans.
Available loan products and resources generally work well with the 70% rule and can be folded into anticipated expenses. That means borrowing delivers the cash-on-hand necessary to press forward with a potentially lucrative project. But the challenges of relying on outside money must also be considered.
Under suitable terms and conditions, loan products can deliver the financial backing necessary to succeed in the house-flipping industry. But borrowers would be wise to consider all the implications and be sure the loan furthers your best interests.
Cindy has been an active Real Estate Agent since 1999 and continued as a Broker Associate in 2002. Licensed in both the state of Georgia and Alabama, her career has always centered around the sales environment. After several years of working in the Corporate world, Cindy decided it was time to step out and start her own business where she could make a difference and contribute to the well-being of others. What better way than getting into real estate!