Flipping homes 101 - Using mortgages to fund the flip
Flipping homes 101 – Mortgages
The whole idea and point of flipping homes is to turn a wreck of a building into a habitat of worth as quickly as possible.
Unless you pay for it with your own cash, you will need a mortgage to finance the venture. The need for a mortgage is why there is such a great need for haste to complete, before the rolling monthly payments swallow your profits.
You will also have to take into account that utility bills will keep coming. This is why a detailed plan must be formulated before you have even purchased the property. In other articles I have mentioned the need to cost your project out to stop any nasty surprises along the way. No greater element should be looked into than mortgage deals and arrangements. A wrong move here could really eat into your profits.
Mortgages for flipping homes can be tricky. Normally the banks like to lock the customer in for a fixed term of around two years before you can pay back the loan. The trouble with that is, your flip should not take you any longer than six months. Of course there are lenders out there that provide bespoke arrangements for flipping homes. But the interest rates for such luxuries can be considerably higher than most normal off the shelf mortgages.
There is a way around this though, especially if you are in it for the long haul. To avoid paying extortionate early redemption penalties for paying off the mortgage before the end of the fixed term, check one aspect of the mortgage product before you take it out with the bank. Make sure the mortgage product is transferable to another home.
Most mortgages will allow you to move the loan from property to property, without paying an early redemption penalty. Once you have finished your renovations, perhaps even halfway through, start looking for the next property to purchase and renovate. That way you will not only save money by not paying an early redemption fee. But you will also save by not needing to apply or take out another mortgage product.
By making sure the mortgage is portable you can just move the loan from purchase to purchase until the fixed term agreement is over. Then you have the option to get out and pay up the loan after selling your latest house flip, or keep the ball spinning for another property.
Currently there are mortgage deals for a two year fixed rate for just over 1% with an average of 2-3% depending on how big your deposit is or your circumstances.
It is true that house prices are high at the moment, and many of my friends who invest in flipping homes are considering consolidating due to the high prices.
But the awesome rates available for a mortgages, make buying property so much easier on your pockets, and I do not believe we will ever see the cheap deals again. Well, not for a long, long time anyway.
Assuming houses will stop rising is also a bad gamble. I believe the market may have a blip or two. But like a juggernaut it will keep climbing. Populations are only getting ever bigger, and people all need a home to live in. So supply on demand will make your investment pay big time in the long run.
The question is not - can I afford to buy a house in todays inflated market?
The question should be - can I afford not to get started right now. Because cash, as you may have already seen in my other posts. Will just dwindle in value over time. That is why I am putting my money into flipping homes and renting out homes.
On the next post I will look into holding on to the property after renovations are finished, and explore the option to rent the home and gain an income, while watching your asset value rise year on year.