Finance or All Cash Flip
Why You Should Always Finance Your Flip
In talking with newbie Flipper Investors, I am always surprised at their reaction to the cost of financing or as I refer to it, the cost of renting money. Essentially, as a Flipper, you can go all cash, or, you can finance. Now most flippers finance simply because they do not have the cash to do an all cash deal. Even so many of these same people can't wait to build up their cash reserve so that they can do ALL Cash deals.
As an Investor, I am always concerned about money out of my pocket. If I can rent money, as much as I can, I will. I am looking to make money on the spread, just like a bank. So, much as possible I want to Rent Money.
316 Stanford Street Las Vegas NV 89107
The property was built in in 1958, 1,040 square feet with three Bedrooms and Two Bathrooms.
Average Comp in the Neighborhood is $94 a foot. Gives this property a $97,760 as is Market Value.
Max Comp per square foot sale is $152.
My Jack Rainmaker ARV could be as high as $156,000!
Now these Numbers are mine and I do not expect anyone to agree with me.
So let's run the numbers two ways;
Scenario One: All Cash
- Purchase Cash & Rehab Cash Required: $113,000
- Estimated Purchase Closing Costs 1.2% of Purchase Price $1,080
- Total Cash In $114,080
- Anticipated net profit after selling & all closing costs $31,000
- Cash over Cash Return = $31,000/$114,080 = 27.1%
Scenario Two: Financing 80% LTV 2.0% Loan Origination and money for five months at 1%
- Down Payment Cash and Rehab Cash Required: $42,080
- Cost of Money $5,040 (7% of amount financed - 2% LO and 1% a month for five months)
- Anticpated net profit after selling, cost of money & closing costs $25,960
- Cash over Cash Return= = $25,960/$42,080 = 61.69%
Wow more than double the return! All you really care about is how much cash am I out of pocket and what is my return? Also, if you had $114,000 cash you could conceivable spread that money to two to three deals, make three times the net cash and actually engage in less risk. Yes less risk. In scenario one you have all of your eggs in one basket. In scenario two you are leveraging your cash and mitigating risk.
I know that some of you resding this are saying, but wait a minute I am making $5,040 less in scenario two, and Yes you are right. However, because you are leveraging or "extending" your cash, you would be running a seond deal and actually making a total if over $52,000!
My philosophy Rent Money and leverage.
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