8 Ways to Fund Your Fix & Flip, Ranked

The Best (and Worst) Ways to Finance a Property Flip

The “best” way to fund a fix and flip depends on your individual circumstances, but for most real estate investors it means the speed and ease of access to money, to secure that deals that turn a profit. We review and rank 8 ways that investors can fund their real estate investments—HELOC, Hard Money, Private Money, 401k, FHA Loan, A Mortgage, Seller Financing, and Subject to. Read on—the results might surprise you!

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Pros of HELOC:

• Lower interest rates than some loans
• Longer repayment terms
• You only pay interest on the amount you use.

Cons of a HELOC:

• Requires good credit and a healthy debt-to-income ratio
• Relies on home equity, worst case risking foreclosure on your primary residence
• Slower approval process doesn’t usually align with the need for speed
• Risk of overspending on renovations, putting your profit at risk.

Overall, if you have good credit, enough home equity, plenty of time to secure the deal, and expect the flip to take longer than a year, a HELOC is possibly your more cost-effective option. Those conditions might work for a hobbyist, but not a professional investor hoping to scale.

RANK: 4

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Pros of Hard Money:

• Quicker approvals and faster closings than other options
• Lower credit scores accepted, as lenders consider experience and the potential of the property
• Focus on distressed properties where traditional lenders shy away.

Cons of Hard Money:

• Medium-high interest rates, compared to other loans on the list
• Repayment terms of 6-24 months put the onus on you to renovate and sell the property promptly
• Expect to pay points—upfront fees for processing the loan.

Overall, hard money loans are the industry standard for fix & flips for good reason. If you need financing quickly on a distressed property, and know you can turn it around in a year, a hard money loan is your top choice. Go into it with a solid renovation plan and a realistic timeline, and you’ll be set.

RANK: 1

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Pros of Self-Directed 401k:

• Lower interest rates
• Tax advantages, as the loan is coming from pre-tax contributions
• Automatic deductions can enforce a disciplined savings approach.

Cons of Self-Directed 401k:

• Complexity of setting up a self-directed IRA that can fund purchases and renovations
• Reduced retirement savings
• Early withdrawal penalties if you retire before repaying the loan in full.

Overall, financing an investment with a 401k loan should be a last resort. It’s generally recommended to prioritize other funding options to avoid jeopardizing your long-term retirement security.

RANK: 7

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Pros of FHA Loan:

• Lower down-payment than other loans (usually 3.5%)
• Less strict credit score requirements than some hard money lenders.

Cons of FHA Loan:

• Effort: FHA 203k loan for renovations requires a lot of paperwork, inspections, and time
• 1-year primary occupancy requirement goes against flipping strategy
• Properties must meet minimum property standards goes against flipping strategy
• Private Mortgage Insurance payment required every month.

Overall, an FHA loan doesn’t work for fix-and-flip projects due to the occupancy requirement, and limitations of the FHA 203k loan. There are some investment situations where it can work for a new real estate investor, such as house hacking on a duplex. But it’s certainly not a scalable option.

RANK: 8

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Pros of Private Money:

• Faster approval processes compared to other options
• Highly flexible requirements around credit score, loan size, timeline, return.

Cons of Private Money:

• You have to find someone with money who is willing to trust it with you
• Higher interest rates—typically double or triple that of hard money lenders
• You need to have a lawyer review your agreement, which is not standardized
• Reliance on individuals leaves you counting on their finance situation and whims.

Overall, if you can handle the higher interest rates and have done due diligence on who you’re getting into bed with, private money can be a good option for flexible funding. But finding your lender means either going to friends and family, which can be fraught, or building professional connections through networking, time, and proven experience—and that’s not so easy.

RANK: 2

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Pros of a Mortgage:

• Potentially lower interest rates, compared to some options
• Longer repayment terms allows you more flexibility to sell the property
• Potential tax benefits.

Cons of a Mortgage:

• Stricter requirements, including good credit, stable income, and high down payment 
• Occupancy requirement for first-time homebuyers conflict with fix-and-flip strategy
• Slower closing cause you to miss out on attractive deals
• Fixer-uppers likely won’t be approved for financing.

Overall, taking a mortgage can occasionally work for a fix and flip, but the stricter requirements, slow process, and property criteria don’t really fit this business.

RANK: 5

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With seller financing, the buyer pays the seller over a period of time that suits both of them. For the seller, it means minimizing taxes and getting a good price. For the buyer, it means offsetting the purchase cost without a loan.

Pros of Seller Financing:

• Negotiating directly with the seller can lead to a quicker closing
• Potentially lower interest rates
• More flexibility in negotiating the timeline of the loan to your specific project.

Cons of Seller Financing:

• Too complex for most fix-and-flippers
• Potential for personal disputes
• Depending on your arrangement, you may not have the deed until you’re fully paid off
• Sellers still want some money in the bank, which means a significant downpayment.

Overall, if you’re a seasoned flipper comfortable navigating complex and creative financing, seller financing may be a route to explore. For those new to fix and flips, loans with more established structures are probably a better approach.

RANK: 3

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With subject-to, you take ownership of the property by transferring the deed into your name, and take on their mortgage payments, while the mortgage remains in the seller’s name. 

Pros of Subject To:

• Keeping a mortgage with a low rate can save a lot of money over time.

Cons of Subject To:

• High chance the mortgage company will call loan due if they find out about the sale
• Risk the seller defaults on the mortgage, leading to foreclosure
• Insuring the home can be challenging
• Educating and motivating the seller on this strategy requires great sales instincts.

Overall, if the stars align and you’re getting a house from a motivated seller you trust who got a financed when interest was 2.75%, this might be a lucrative play. But come on, how likely is that?

RANK: 6

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FINAL RANKINGS

1. Hard Money

2. Private Money

3. Seller Financing

4. HELOC

5. Mortgage

6. Subject To

7. 401K

8. FHA Loan

As those in the game know, the deal is the money—a successful fix-and-flip hinges first on getting the property, then managing renovations, and promptly selling or refinancing. With that in mind, the top choice for most flippers is Hard Money Loans. Let us know what you think, and don’t forget to consult with an expert before making your decisions.