{"id":59569,"date":"2014-07-07T04:00:28","date_gmt":"2014-07-07T10:00:28","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=59569"},"modified":"2021-03-16T10:21:28","modified_gmt":"2021-03-16T16:21:28","slug":"2014-07-07-shocking-truth-getting-money-first-house-flip","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2014-07-07-shocking-truth-getting-money-first-house-flip","title":{"rendered":"The SHOCKING Truth About Getting Money For Your First House Flip"},"content":{"rendered":"

Last week, I talked all about the many benefits of using hard money<\/a> to fund your first flip.<\/p>\n

Although there’s lots of people who are “in the know”<\/a> and completely understand hard money, there are far too many who still think the opposite.<\/p>\n

Let me tell you why<\/strong> this is so wrong…<\/p>\n

The “Big Question” and How Hard Money Can Solve It<\/h2>\n

As many of you know, I have a house flip business which I spend 95% of my time with – but\u00a0I also have a blog on house flipping to help new investors.<\/p>\n

For every new person who subscribes to my blog, I email them a question like this a few weeks after they subscribe:<\/p>\n

Are you still interested in flipping houses?<\/em><\/p><\/blockquote>\n

After they say “yes”, “no” or tell me what’s their situation is, I then email\u00a0them back usually asking this:<\/p>\n

“What’s holding you back from getting started?”<\/em><\/p><\/blockquote>\n

Here’s why understanding hard money is SO important…<\/p>\n

These are just a few answers (not edited at all, by the way)<\/em>\u00a0from the last two days back to me on email:<\/p>\n

“Yes I am Mike, \u00a0just don’t have extra cash or credit right now”<\/span><\/em><\/p>\n

“Money a good mentor\u00a0 and a business partner.”<\/span><\/em><\/p>\n

“Just hard to believe you can do re without money.”\u00a0<\/span><\/em><\/p>\n

“Mike – Time and money.”<\/span><\/em><\/p>\n

“I am interested, but at this point I don’t have the cash flow to do it at this time……..”<\/span><\/em><\/p>\n

“Lack of funding or knowing where to get\u00a0 it.”<\/span><\/em><\/p><\/blockquote>\n

What’s the one common element in all those answers?<\/p>\n

You guessed it: Money<\/strong>. It’s the great stumbling block for nearly every new house flipper.<\/p>\n

So how do you get “money”?<\/p>\n

How you get it has a lot to do with the numbers and the how then comes from those numbers. Let me explain….<\/p>\n

The 70% Rule and The Elephant In the Room<\/h2>\n

By now you probably know about the 70% Rule<\/a>.<\/p>\n

As has been discussed in this space many times, its\u00a0the fundamental rule<\/a> in house flipping.<\/p>\n

So because it’s so important, lets review some of the details a little further.<\/p>\n

Related:<\/strong> 10 Rules for Investing in Real Estate Without Looking Like an Idiot<\/a><\/em><\/p>\n

The 70% Rule Fundamentals<\/h3>\n

So for example, you\u2019ve determined with your broker that the ARV\u00a0of a certain house is $200,000. There are plenty of comps in the area and you feel comfortable with that number.<\/p>\n

So to get to the 70% Rule, you do the following:<\/p>\n

1. Take\u00a0the $200,000 and multiply it by 70%, which equals $140,000:<\/p>\n

ARV:\u00a0$200,000<\/p>\n

70% Rule: $200,000 x .70 = $140,000<\/p>\n

2. To get the maximum amount you should pay for the house, you then deduct\u00a0your renovation\u00a0costs from that $140,000. In this case,\u00a0let’s say your rehab expenses will be $40,000:<\/p>\n

Subtract the $40,000 from the $140,000:<\/p>\n

Repair costs: $40,000<\/p>\n

70% Rule: $140,000<\/p>\n

Maximum Allowable Offer (MAO): $100,000<\/p>\n

In this example, you’d make an offer below $100,000, then most likely negotiate up if you need more wiggle room. When all your costs come in as expected, you will make a nice profit on this flip no doubt.<\/p>\n

The 70% Rule Profit Breakdown Using Hard Money<\/h3>\n

Typically when we apply the 70% rule, it breaks down like this:<\/p>\n