Should You Pay Cash or Use Hard Money for Your Next Flip Deal?
I had made up my mind. No more debt.
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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.