Page 28 - The basic principles for investing in real estate

This is a great program for the person who wants to get into flipping but does not have the
money or credit to go through the other routes. Why not start by flipping your first home? If you
live in it for two years, you can write off most of the profit that you gained through the flip.
Flipping your first house is a solid way to begin to get into the world of flipping, and the FHA
loans provide very low down payment requirements as well as lower rates than conventional
mortgages.

Unfortunately, FHA loans are not an option for someone who has already purchased a home or
is looking to flip the home within one year of purchase. If conventional mortgages or FHA loans
are not your thing, there is another avenue available, the classic funding source of flipping, hard
money.

Hard money is the loose term for using any private lender that is able to provide funds
immediately. Private lenders are the lifeblood of many flipping businesses. They have many
advantages that are valuable in the world of flipping: the money is available immediately, with
minimal effort on your part. Many times the money is also available to pay off only when you
close escrow on your house, so you can avoid making interest payments when you’re rehabbing
the property. These lenders are often the only lenders who will lend on a foreclosed house, or a
house that has extensive damage. If you need to pay for repairs on the property, some hard
money lenders are even willing to loan you money for rehab costs.

The downside to these advantages is that the interest rate that they charge is higher, twice as
much or more as conventional mortgages, and the down payment they demand is usually
higher than conventional mortgages. All-in-all however, many flippers prefer to use these
lenders for their ease and flexibility.

The last loan that will sometimes be used in rehabbing is the construction loan. This loan is
taken out like a mortgage, directly from a bank, and can oftentimes be packaged with a
mortgage. These loans are harder to acquire however, and can require a lot of convincing of the
local loan officer. Obtaining a construction loan requires that you sell a loan officer on the
economic potential of your flip, and should be treated in much the same way as a business plan
presentation. If you’re able to produce convincing numbers and demonstrate your thoroughness
in researching the market and costs, you may be able to procure a construction loan. And if you
do manage to obtain a construction loan, you’ll have the best of both worlds—a low interest
rate, and you don’t need to provide the money for construction.

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