Getting Ready For First Flip.. Does this financing order matter?

[Samantha Schiabor]

My husband and I are planning to do our first flip.. we've been researching different kinds of financing and see hard money to cover the purchase price and a heloc for downpayment/reno costs as our best options. We have about 100K in equity and have some cash on hand but not enough to cover a 20% down payment, loan costs, and rehab costs so the HELOC or second loan seems to be needed for our first deal. My question is, if we do a HELOC would it affect a HM lenders decision to lend and is this a good method for using as a downpayment? Is there an order in which you would apply for these loans due to credit inquiries? Your thoughts, experience, and/or suggestions are much appreciated!

[David M.]

@Samantha Schiabor

Given the rate environment, I'd go with keeping the hloc in reserve.  Use your existing cash on hand and the hard money lender to fund the flip.  If you run into any troubles, at least you have your hloc ready.

Since flips have that high risk of having extra expenses, something like the hloc can function as the reserve.  Honestly, I personally don't like the idea of the hloc being the reserve as that means you are "betting your house" on the deal.  So, if something goes wrong, now you've got a loan on your house that you may not be able to immediately payoff.

As mentioned, don't forget about your taxes.  Many new investors miss the part about flips being dealing in inventory, not investment property.  So, the profit is taxed as ordinary income, including self-employment tax.

Hope that helps.  Good luck.