Leverage is, simply put, the process of using “other people’s money” to lessen the risk and increase the return on investment in home flipping deals, or any financial deals, for that matter.
The average homeowner has used leverage for years; they called it a mortgage and paid it back over 20 or 30 years. In the home flipping game it can be disguised in many other forms.
This is basically how it works.
Say you wanted to start flipping homes for profit and you had enough money to buy the house and fix it up in the bank. Would you want to risk all your money on the deal or would you want to lessen your risk and increase your return on your money you did risk. Of course you would, if you could, use leverage.
Let’s say you could buy and fix up a house for $100,000 and turn around and sell it for $150,000. If you put up all the money yourself it would earn you a return on your investment of $50,000 or 50%.
Now let’s say you could get and fix up the same house but you instead borrow $50,000 and put up $50,000 of your own. Once the house sold for $150,000 and you repaid the $50,000 you borrowed you would still only make $50,000 net but would only have risked $50,000 and your return would be 100%.
The way you get leverage is to find other people or companies that will lend money on house flipping deals you put together.
Here are a few ways to do that.
Believe it or not there are people out there looking for just these types of investments. Of course you will have to pay higher interests but you won’t have to go through a lengthy qualifying process. Usually all you have to do is find these people and convince them that the deal is worth their risk and that you can actually do what you say you will do.
If you already own a home you may be able to finance the equity in your home and use it for your deal. This could be a little time consuming unless you have the next way set up first
Line of Credit
This is a revolving loan, usually guaranteed by a second mortgage on your property that you repay as interest until your deal is complete, then you repay the whole amount.
You may be able to strike a deal with the owner of the house you are going to buy and fix up. Say he will sell you the house with a balloon payment due when you resell the home after fixing it up.
There are many ways to structure the financing above and it beyond the scope of this article to go into all those ways. Suffice it to say that you will want to get professional advice on any of these methods until you have done a few and get to know them better.
By Robert Holiday