The best place to find cash is in a deal that does not require any upfront money. This would include being a scout, leasing a house with an option to purchase it in the future, buying a home for your personal residence, or buying a fixer-upper property significantly below eventual market value.
Scouts earn fees from flippers by finding deals for them. You can save your fees until you have enough for a down payment for your own flip.
Renting a house with a purchase option usually requires only the first month’s rent and a security deposit. Better yet, you might want to help a friend or relative find a rental house with a purchase option. Your friend pays the rent and security deposit, your friend lives there, but he or she assigns the option to you. You have no money in the deal at all, but you can still sell your option to someone else at a profit. In other words, if the option gives you the right to buy the house for $129,000, but the house is really worth $139,000, someone might buy your option for $5,000. That gives him or her the right to buy the house for $139,000, making a total outlay for him or her of $144,000. The house is really worth $149,000, so they get a bargain. The landlord gets the amount of money he wanted, and you make $5,000 on the transaction with no money down.
Homeowners can often borrow 100% of the money necessary to buy their personal residence. If you do this and use the homeowner flip strategy you can get started with no cash.
Commercial lenders will loan you 100% of the purchase price of a property, plus the money necessary for repairs and holding expenses, if the final value of the house after repairs will be at least 25% to 31% more than the loan. I once borrowed $200,000 for a house flip, $150,000 for the entire purchase price plus an extra $50,000 for repairs and holding costs. When the repairs were finished, the house was worth $350,000.
As flipping becomes more popular, though, the no-cash deals will not be as plentiful as they once were. If you need some cash for a down payment and for expenses, and it is not sitting in your bank account, where do you find it? Investors are one solution. Plenty of doctors, lawyers, high-commission salespeople, professional gamblers, and other such people are always looking for real estate investments. Some books recommend going to friends and family, but I discourage this. An investor understands that he or she is putting money at risk, and that he or she might lose the investment. Friends and family do not usually understand that, no matter how hard you try to explain it to them. They trust you and think failure is impossible. If the unthinkable happens, and you lose their money, you might damage that relationship forever.
Under the right circumstances, you can borrow money from your retirement account to make investments. Check with your plan administrator for the rules and details.
A home equity line of credit might be the answer. You borrow whatever you need for the down payment and expenses of a flip, and then repay the home equity loan when the flip sells. Similar, but more expensive, is using your credit card to fund the flip. I do not recommend this for most people, but sometimes it is the only way you will be able to get the money. If it is the only way to get the money, though, think about whether or not the risk and high interest rates are worth it to you.
You also might want to think about what you are willing to sell to finance your flip. Are you willing and able to give up a second car in order to save the money for a real estate investment? What about vacations, a boat, new audio equipment, season football tickets, or
832 cable television channels? Save your way to a down payment by examining what is important in your life and what you can trim out of the budget.