To leverage or not to leverage that is the question....

[David Robertson]

Background: I am currently looking at purchasing a house listed at around $14,000 to flip as my first real estate investment. I have ran the numbers and think the house needs around $11,000 (with a 10% contingency) in renovations to meet market standards. I have found comparables in the area that sold for around $35-40k in less than 2 months on the market (1 house sold in less than 10 days). With renovations my houses' quality would exceed the comparables so I think I could reasonably sell it for $35,000.

I had planned on making a cash offer at $10,000 for the house w/ $11,000 in improvements, and $4,000 in closing costs= $25,000 invested.

I have enough cash to cover this amount, but it would be over 50% of my cash which makes me feel a little uneasy. With interest rates at record lows it seems leveraging my money would be wise, but I would rather not deal with the mortgage company and the payment (although it would be very small). I could get a mortgage & construction loan for the property and minimize my cash outlay.

What are your thoughts? Any advice? Should I finance the project or go all cash?

Side Question:
1. Is a $10k cash offer for a property listed at $14k reasonable?

[Harry M.]

I agree with the other posters that 4k in closing costs is way high. I'd be surprised if you really paid more than around 800.

Regarding financing - one alternative would be to pay cash for the house itself, and if you have a credit card with a good interest rate such as 9.99% or 10.99%, use it for the rehab costs. That will be cheaper than getting a hard money loan (and I'm not sure how many HML's will go that loan for the amount financed), and won't have any loan origination fees (substantial for hard money loans).