Hi everyone,

I started as an accidental landlord and now own two rentals in the Fort Worth/Arlington area.  I'm looking for more active income and want to flip my first house, but I'm concerned about financing with hard money.  I have enough cash flow to cover carrying costs and utilities, but no cash for down payment or rehab.  

Is it really as easy as they say it is to fund a flip with hard money?  Should I be looking for a deal first, or should I reach out to a hard money lender prior to finding the deal?

Thanks for the guidance,

David Gillilan

Hey welcome to the site @David Gillilan  , thanks for introducing yourself. Congrats on your rentals being a success so far as well.

Those are good questions to be asking about hard money. If you haven't already, listen to this podcast BiggerPockets Podcast Show 09. I have a feeling it will answer a lot of questions you have on hard money.

Thank you for the direction. 

David

Hello @David Gillilan  ,

The cost of money is only one of the cost elements to be considered on a flip. But, how much of an impact is the cost of money? I will show you how I would build a spreadsheet to determine the effect of various money costs. Before I do that below is how I determine the maximum price I can pay for a flip in order to make a profit.

Work backwards to make money

Suppose you find a property that looks like a good flip. You carefully study recent sales comps and decide that after being remodeled to market standards, the property should go under contract for $200,000 within 60 days after the rehab is complete and it is placed on the market. And, your trusted contractor conservatively estimates it will cost $40,000 and take 2 months to bring it to market standards. Since profitable flippers are pessimists I would estimate the total rehab cost as $50,000. Your hold time will be:

As to profit, suppose you are OK with a 10% return. So, your goals are:

On hard money financing, the last time one of my clients used hard money the terms were: 40% down, 5% up front, 9% interest, 18 month life of the loan. For the example property your loan costs would be:

Also you determined that the real estate tax rate is 1%, property insurance is $450/year, purchase (closing) costs are 3% and cost of sales (commissions, closing costs, etc.) will be 8%. I put these numbers in the table below:

Now that we have an (over simplified) estimate of the total cost, we can work backwards from the probable sales price to determine the maximum price we can offer.

Based on the above, you cannot pay more than about $99,000 for this property if you are going to make money. I created a spreadsheet to calculate the above numbers which is illustrated below. If you (or anyone else) would like it, drop me an email.

Using the spreadsheet as a starting point you can build a model for determining the maximum price you can pay for a property. 

I have a few flip considerations for you.

Flip considerations

• Before settling for a hard money loan, check into alternatives. Talk to a knowledgable lender about 203k loans and possibly HomePath. You need to get this nailed down before you even start looking.

• You may have noticed that I used the phrase "market standards" multiple times. There is a common erroneous belief that if a property is "really improved" that it will sell for more than what similar homes have sold for. This is never true. If similar homes are selling for $200,000, even if you put $100,000 of "improvements" into the property, it will not significantly increase the sales price. One of the biggest challenges for new flippers is the tendency to remodel the property to their taste as oppose to rehabbing to market standards. If similar homes are selling for $200,000 with vinyl floors, travertine tiles will not significantly increase the sales price. You need to really know what characteristics made similar properties sell and not go much beyond that. Cost control during the rehab is critical. Of course, there are small things that can make the property much more desirable to potential buyers without spending a fortune. For example, ceiling fans in the master bedroom and family room, improving the curb appeal and the front entrance area, fresh paint, etc.

David, I hope the above helps. Flipping can be a profitable business but only if you really know what you are doing and you have a well thought out plan. Be careful and good luck.

Eric Fernwood

Thanks @Eric Fernwood,

I feel like I have a good handle on the math to determine the maximum offer, but your software would be a big help regardless. The question I have is, where can I access sales comps if I'm not a licensed agent?

Thanks again,

David Gillilan