Overview
Before you purchase your first flip property, you need to consider how you are going to fund the purchase and repairs.
Real estate is an expensive industry to start a business in. According to Zillow, the
median house price in the United States is $375,000, and real estate can be much more in urban markets on the East & West Coasts. Once you factor in other costly expenses such as your buying costs, holding costs & repair costs, you could easily need over $300,000 in capital just to fund one flip project.
That capital can come from one of two places: your own cash, or other people's money (OPM), whether that's a hard money loan, a private investor, a bank, or one of the other funding paths covered elsewhere in this chapter. Before you get into comparing specific loan products, it's worth understanding the tradeoffs between these two approaches at a fundamental level, since that decision shapes how fast you can scale and how much of each deal's profit you actually keep.
Key Takeaways
- Using your own cash is the cheapest option and makes your offers the most attractive to sellers, but it's the hardest way to scale since your capital is tied up in one deal at a time.
- Using OPM costs more in interest, points, and fees, but it multiplies your purchasing power, letting you run multiple deals at once instead of one.
- Most active flippers use a mix of both over time, cash for smaller pieces of a deal, OPM to unlock scale, rather than picking one approach permanently.
- The "expense" of OPM is a cost of doing business, not a reason to avoid it, as long as you account for financing costs accurately in your deal analysis.
Using Your Own Cash
If you are fortunate enough to have enough investable cash to fund your own flip projects, you could simply write a check to purchase the property and fund all of the project expenses.
Paying cash is fast, easy, cheap, and makes your offers very attractive, but there are drawbacks to paying cash as well.
Pros of Using Your Own Cash to Fund Your Flips
- Attractive Offers- Seller's generally prefer cash offers because there aren't any financing contingencies or hurdles that could prevent the deal from closing.
- Close Faster - With an All Cash Offer, you can close faster because you don't have to waste time dealing with lender paperwork, appraisals & inspections.
- Easier Acquisition & Management - Eliminates the lender paper work at closing and eliminates the hassle of on-going draw requests and draw inspections to get your money for the project.
- Cheapest - Eliminate expensive lender loan origination fees & points (2-4% of loan value) and interest payments (5% - 15% depending on the lender).
Cons of Using Your Own Cash to Fund Your Flips
- Hard to Scale - The main problem with using your own cash is that you likely won't have enough cash on hand to purchase more houses to scale your business. Unless you have millions of dollars in the bank, at some point you are going to have to use other people's money (OPM) to fund your projects.
- No Leverage/Lower ROI - With 100% of your own capital in a deal, your return on investment is diluted compared to using leverage to control the same property with less cash down.
FAQ
Can I Flip Houses With No Money of My Own?
Yes, it's possible, but it's harder, not free. A hard money lender can cover most of the purchase and rehab, but nearly every investor-specific loan still requires some skin in the game, whether that's a down payment, closing costs, or a cash reserve for holding costs. Truly zero-cash deals usually mean stacking strategies, like a hard money first loan combined with a private money or seller-financed second position, rather than one lender covering 100% of everything.
Use Other People's Money
If you aren't fortunate enough to have an endless supply of your own cash, at some point you will have to use other people's money to scale your business. The most common way to use OPM is to get a loan from a lender, but there are also creative strategies, covered elsewhere in this chapter, that can be used to fund your projects as well.
Benefits of Using Other People's Money
- More Purchasing Power - One of the most important benefits of using OPM is that it gives you more purchasing power to purchase additional properties and scale your business.
- For example, let's say a flipper has $150,000 to invest in their house flipping business in a market where the average distressed property is selling for $100,000, needs $50,000 in repairs, and resells for $200,000. In this example, the flipper would have to dedicate 100% of their capital to one single project. If the average project takes 4 months to flip, the flipper will only be able to flip 3 houses per year.
- On the flip side, if the flipper raised outside funding and put 25% down, the flipper would be able to flip 4 houses at a time, or 12 houses per year. In other words, this extra purchasing power allows the flipper to scale the business 4x faster.
- Higher ROI - With less cash invested in each deal, an investor can achieve a higher ROI from the profit earned on the project.
Cons of Using Other People's Money
- More "Expensive" - Using a lender is more expensive than using cash. You will have to pay your lender a monthly interest payment, points upfront, and other fees.
- Close Slower - Generally, a hard money lender can close in as little as 7 to 14 days, so this is not a significant issue, but it does take a little longer than a cash purchase.
- More Paperwork & Documentation - Lenders will generally require more paperwork upfront at closing and documentation during the rehab in order to receive your rehab draws.
- Less Attractive Offer- Seller's may find a financed offer less appealing due to the increased risk that the property may not meet the lender's underwriting requirements which could prevent the deal from closing.
FAQ
Does Using a Loan Really Cut Into My Profit That Much?
Less than most new flippers assume, as long as it's accounted for upfront. Financing costs are a line item in your deal analysis, not an afterthought, so a well-underwritten deal already has the interest, points, and fees baked into the numbers before you ever make an offer. The real profit killer isn't financing itself, it's underestimating it and getting surprised by it after you're already under contract.
Reality check
Using other people's money is definitely more "expensive" than using your own cash, but using OPM is just a necessary evil and cost of doing business. As long as you remember to include the financing costs in your analysis, you shouldn't worry about the expensiveness of the loan.
You need to switch your negative perceptions of lenders and think of funding as a resource that can help you acquire more properties, make more profit, and scale your house flipping business.
Common Questions
Can I Combine My Own Cash With OPM on the Same Deal?
Yes, and most experienced flippers do exactly this rather than picking one approach permanently. A common structure is using a hard money or DSCR loan to cover the bulk of the purchase and rehab, while putting your own cash toward the down payment, closing costs, or holding costs. This reduces how much you're borrowing (and paying interest on) while still preserving enough of your own capital to run multiple deals at once.
How Much Cash Do I Need to Start Flipping Houses?
There's no fixed number, it depends on the loan structure and the market you're flipping in. If you're using a hard money loan that covers a high percentage of the purchase and rehab, you may only need enough cash for your down payment, closing costs, and a reserve to cover a few months of holding costs if the project runs long. In more expensive markets, or with lenders that require larger down payments, that number climbs accordingly.
Where to Go From Here
Not Ready for Hard Money?
Hard money, DSCR, and new construction loans are the standard tools for active real estate investors, but they aren't the only way to fund a deal. If you're just getting started, don't yet qualify for investor-specific financing, or simply want to explore lower-cost options like local banks, private money from your network, or tapping into home equity, read
Alternative Ways to Fund Your Flip for a full breakdown of options outside the hard money space.
