Until recently, home flippers had few options for financing. Now, traditional lenders and crowdfunding firms are increasingly willing to put up the money.
Luxury-home flippers can be lucrative, but risky because with one flip you could make the same amount that you could with 10 deals of a lower-end property. However, you are putting many more eggs in one basket and counting on that one property to deliver.
Many big name flippers who have been in the business for awhile have normally established business lines of credit at local banks with about a 5% interest rate that can be drawn against to acquire more homes. They also work with private investment companies, which can charge higher rate but are able to respond quicker than a bank.
Many small-scale home flippers still rely on hard-money loans, which are short-term, high-interest loans provided by private investors. Typically private investors will finance up to 60% of the estimated after-repair value of the homes purchased for over $500,000. That means if a house costs $600,00 but will be worth $750,000 after repairs, the private investor will lend up to $450,000, with the flipper putting down $150,000 in cash.
Another source of financing for luxury flippers is crowdfunding. This is where the funds to finance a deal are raised through the contributions of a large number of people, usually via the internet. One of these companies is called RealtyShares which funds up to 70# of the estimated after-repair value of a property in a little as 10 days. Interest rates vary from 8% to 11%, with the average loan term on luxury flips is 12 months. RealtyShares also does prefer- equity deals, where they take a partnership interest in the property and benefit from both the interest paid and the potential upside of the transaction.
Luxury Flippers Should Consider…
- The Numbers Are Critical. Make sure your budget is realistic and your contractor has a record of finishing on time. Luxury flips take more time than lower-cost ones. On average luxury homes take 208 days, compared with 1818 days for all flips. A delay of just days can bring additional costs that will eat into profits, so make sure your budget included reserves for contingencies, such as delays in getting construction permits.
- Details Count. Luxury buyers are demanding when it comes to high-end finishes. Hire a good designer and pay attention to the details when renovating a property. Factor in the cost of luxury upgrades a buyer will expect.
- Beware of Defunding. Like banks, har-money lenders and crowd funders secure their loans with a mortgage. They may also report your failure to pay to the credit bureaus, which can affect your credit score.
