Private Money vs. Conventional Financing for Flips

As a borrower, you want conventional financing - for the low interest rates. Or FHA, for the low down payments. For houses you plan on keeping for rentals or living in, yes, that is true. However, for flipping houses, you are in a different game. Understanding how financing works will help you understand why conventional financing is not the preferred way to finance houses for flipping.

When you get a loan from a lender for a house, that bank sells the loan to the secondary market who then sells it again. If you pay off that loan in less than 2 years the originator of the loan may be on the hook to pay back any refunds or discounts they had received for selling that loan - thereby reducing their profit to nothing. Banks are in business to make money and if you consistently pay off your loans, the originators will stop lending to you.

If you have a line of credit, that is a different story. You can use and pay off that debt as much and as often as you like. It is designed to allow you to do that.

If you have a private money source, it is in the best interest of the lender for you to pay off and buy another property. Every time you borrow money and pay them back, you are proving you are effective in your business. They get paid and you get paid. Then, they are ready to lend once more to earn again. As long as you keep paying them back, they will be willing to lend you money.