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Should You Pay Cash or Use Hard Money for Your Next Flip Deal?

by Marty Boardman on April 13, 2012 · 12 comments

  
hard money

I had made up my mind.  No more debt.

No more credit cards.  No more car payments.  No more hard money loans.

Sure, paying 18% was steep.  But that wasn’t the real reason I decided to give up leveraging my fix and flip deals.  Borrowing money had bankrupted me in 2007.  The funny thing about creditors is they don’t give a damn if your real estate investment portfolio drops in value by 65% – they still want their monthly payment.

Then the summer of 2009 rolled around.  I owned two free and clear flip deals that were both in escrow to sell.  I also had $45,000 in the bank.  My wholesaler called me about a nice property he had just picked up at the auction.

The purchase price was $80,000 and the house needed about $5,000 in repairs.  I knew in good condition it would sell for at least $115,000.  Unfortunately, I didn’t have enough cash to take the deal down.  And, I had drawn a line in sand – no more hard money loans.

But, the great thing about lines in the sand is that they’re easy to erase.

This deal was too good to pass up, so I used hard money.  47 days later I sold the house and net $18,000 in profit after paying a $900 loan origination fee and 18% interest to the lender.

I’ve been using hard money ever since.  Here’s why:

  • With $100,000 cash and 75% leverage I can buy three $80,000 houses and still have $40,000 left over for improvements and holding costs.  After closing I net $12,000 in profit for each property, a total of $36,000.
  • With $100,000 cash and no leverage I buy one $80,000 house, have $20,000 left over for improvements and holding costs.  After closing I net $18,000 in profit.

Of course, using leverage can be risky, and costly.

However, tying up all your cash on one deal can carry an equal amount of risk.  You could break even, or worse lose money on that one deal.  And while your cash is tied up in that one bad deal several other great ones pass you by.

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{ 12 comments… read them below or add one }

Arthur Garcia April 13, 2012 at 9:20 am

Great Point Marty. I’ve always been a little hesitant to take on too much at one time, but I think your point is clear, take on risk, but still have have a few exit strategies. The nice thing about HML is that if the S*^%! hits the fan they just keep the property.

thanks for being transparent with your experiences.

AG

Reply

Marty Boardman April 16, 2012 at 11:11 am

Arthur, first of all, great meeting you at the BP Summit in Denver last month. I’ve become a big fan of HM, mostly because it offers more diversification. Of course, if you’re only doing a deal here or there cash may be the better route.

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Jack Knochel April 13, 2012 at 10:02 am

Hey Marty, I am still trying to get my arms and mind around using HML instead of my own money. Paying the application fee, the 4-5 points up front, and 15% is hard to swallow. I see profit go away with the loan, but then like you said, you can be in more flips at one time if you use their money. But I have a question for you along those same lines, I have at least 4 folks wanting to partner with me, 50/50 on flips, they all have $50k-100K to bring to the table, so my thoughts was I can get into 3 or more deals at a time with them. Whats your thoughts on doing that instead of using HML? THANKS

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Marty Boardman April 16, 2012 at 11:08 am

Jack, why not do both? You can use HM to finance 70% of the deal and use your partner’s money for the other 30% – then split the profit 50/50. You can do more deals, more diversification and higher ROI.

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L Gale April 15, 2012 at 2:54 am

Great article and it’s something that has been on my mind a lot lately. The pros of using a HML all go as you stated, but in my opinion you missed the biggest con of using the HML. I think the biggest con is losing the deal because you have to bid higher (adjust for cost of money) than the investor using his/her own cash. I will add that sometime in the near future I will be looking to go the route of HML’s to increase my deal load. However as soon as I have the resources to eliminate that avenue I will do so. In doing so I would expect to increase my profit per deal, and number of deals completed by outbidding the competition.

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Marty Boardman April 16, 2012 at 11:14 am

L Gale, actually you have to bid lower to adjust for the cost of money. However, if you’re willing to accept a little less in profit on a per deal basis it shouldn’t be an issue.

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Bob Davidson April 15, 2012 at 3:31 pm

Why are you paying 18%? Here in The San Francisco area there is so much competition among hard money lenders (they now call themselves Private Lenders, it sounds better) that they are offering terms of 2 – 4 points and 10 – 13 %. Reason, so many people have invested money with them they are getting pressure to get the money working. Now, the house still has to be a good deal and they still want some skin in the game (although a few have said they know investors who will do a 2nd for the down payment and fix-up costs for an equity share.) Check with your REIA clubs and call several lenders.

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Marty Boardman April 16, 2012 at 11:27 am

Bob, check out my last post about private money,

http://www.biggerpockets.com/renewsblog/2011/09/01/private-money-when-18-is-less-than-12/

It takes me about 70 days from acquisition to closing to flip a house in Phoenix. On a $100,000 loan paying 12% and 4 points that’s an APR of 33% ($6,301 in points and interest). At 18% with $900 flat loan origination I pay $4,352 in interest/fees on a $100,000 loan. When it comes to private money/interest rates sometimes more is less.

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Dustinca April 16, 2012 at 7:50 am

So if you were only doing say 5-6 flips a year would you consider the cash route?

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Marty Boardman April 16, 2012 at 11:30 am

Dustin, I’d still consider HM. You never know when you might need the extra cash.

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Aaron Norris April 16, 2012 at 11:04 am

Great points. Many working with partners unfortunately don’t think of using hard money even though they spend more working with partners. We also have plenty of people paying cash and then doing a refi with hard money to address what L Gail was talking about.

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Marty Boardman April 16, 2012 at 11:32 am

Aaron, I agree. I like using private money and partner money together. I believe it’s safer for everyone involved.

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