Start up Cash

6 Replies

hi, I've been lurking off and on for a while. My partner and I are newbie- wanna be rehabbers  in Albuquerque. We had a financial partner, but that fell through. Both my partner and I have remodeling experience. I have a head for numbers and like to research things. We know we can make this work. We have determination. The one thing we don't have is $. I've gotten names of private and hard lenders, do these really work? Also does anyone have any ideas, (other than wholesaling) how to raise start up cash for initial costs, like earnest money and inspections. We have very limited financial resources, but very strong motivation. Thanks in advance for any advice.

Welcome to BP @Sue Erling .  Even hard money lenders want you to have skin in the game.  You will probably need to have some money lined up unless you can give a very good resume of properties you have flipped before.  Perhaps you could get a family member to be your first investor?  Good Luck.

do you have any assets you can sell?  When we started out, we basically sold everything that wasn't bolted to the floor.  It was tough to get rid of things that you thought were needs, but when you sit back and truly evaluate are just want.  I will give you a few examples...for me, it was my dirt bike and guns.  For my wife it was her $1k+ sewing machine.  These were toys that were very important to us, bit we realized that our financial could be greatly improved by separating needs and wants.  Good luck and let me know of this fellow new Mexican can help out.

@Sue Erling When you use a HML you can't think of their cost the same way as you would a mortgage...because they are not the same thing. HML is a short term use part of the house (the money to buy/rehab), and the cost for it are treated as expenses. Just like it will cost $2000 to paint a house, it will cost $5000 to use the money.

Let's say you are using $50,000 to buy/rehab a 1000 sf house. The painter charges $2/sf to paint the house, cost would be $2000 on this house. The HML charges 5 points & 15% interest (simple/anual) for 4 months. The cost of the money is an added $4800...and should be figured in with all the other rehab expenses. The money is just another part of the rehab.

If you look at it this way, you shouldn't look at the interest rate or points charge the same as you would for a mortgage. It's not "apples to apples". You are going to carry a mortgage, so the interest rate is important for the added cost against your cash flow every month. The interest on a HML just sets the total cost of the money you need to buy/rehab.

The most important part of using HML is you must have an exit strategy waiting at the end (end mortgage, partner, buyer, etc...) to "take out" the HML.

Joe Villeneuve

Also does anyone have any ideas, (other than wholesaling) how to raise start up cash for initial costs, like earnest money and inspections.

Well, wholesaling is just a job, so how about some other job?  What are your skills and experience?  Can you find a part time, second job leveraging those skills and save every penny of income from that to start flipping?

What about cutting expenses?  Cable?  Eating out?  Anything?  Dave Ramsey's "Total Money Makeover" has a lot of good thoughts on this.

True private lenders are people you personally know.  Talk to everyone you know and everyone you meet about what you're doing.  Or, in your case, what you want to do.  Once you have some experience it will be easier to get these people to invest in you.  When starting its tough.  

Anyone who advertised they're a private money lender is probably really a hard money lender. Yes, hard money really works. But it is very unlikely to fund 100% of a deal. For rehabbing, a magic number is 70%. That means 70% of ARV. ARV is the actual final selling price, not some speculative high number. It is VERY hard to figure this number out but ABSOLUTELY essential you have a good handle on it. More on this below. If Purchase plus rehab (another hard number to estimate) is 70% of ARV, you use hard money to fund the bulk of the deal and you sell in six months you stand to make a profit of about 13% of ARV. The other 17% goes to purchase and sale closing costs, holding costs and money costs. If the HML will lend you 70% of ARV I estimate you will need an additional 15% of ARV of your own cash. Many HMLs have limits on their loan vs. purchase and rehab. If so, that's more cash out of your pocket. For example, if the HML will go up to 70% but will only lend 80% of purchase plus rehab, you would need to cover that last 20% out of pocket, in addition to the 15% of ARV I mentioned above. Fix and flipping is capital intensive.

While you're working on accumulating the necessary cash, start learning values. Start researching areas. Find an agent to work with and go look at current listings. Both junky ones (your raw materials) and fixed up ones (your competition). Watch listing prices and watch when a house sells. Take lots of pictures and keep notes. This will help you learn what matters and what doesn't. Often homeowners do improvements based on what they want. That doesn't always translate into the same improvement in value as the cost of the improvement. That's fine for me. If I want a fancy kitchen or a fancy bathroom and can afford it, fine. I'm not really concerned about the value of the property. As a fix and flipper, if you spend a dollar doing something it better pay you back $1.10. If it only adds $0.90 in value you've just wasted a dollar. So, watch the inventory of houses, watch them come on the market and sell. If you do this for the year or whatever it takes you to build up your kitty you will be in a good position to understand values. If you're diligent about doing this, you will get a good handle on values in an area. If you're laxidasical about this or rely on someone else to give you their estimate of a value, you're probably going to fail as a fix and flipper. Determining ARV is very hard yet it is the single most important number in the process.

You say you have experience doing remodelling. What do you mean by that? Painting and fixing stuff? Or knocking down walls, doing plumbing and electrical work? Experience with hiring contractors? Getting permits and dealing with city inspectors? Are you licensed general contractors? Have copies of the relevant code books for your areas and know what they say? If not, that's another area of study. Doing a major rehab with permits for a house you're going to sell is a much bigger deal that a small project in your own house. Estimating rehab costs is easier than ARV, but still hard. And hard to get accurate because its difficult to know what you're going to find when you open a wall. "It was like that when I got here" doesn't fly with inspectors. You touch it, its your problem to fix.

Read J Scott's book:  The Book on Flipping Houses.

Thank you all for your input. As far as the rehab skills, I was a service and repair plumber in my 20's and my partner has done a lot of electrical. We've both done assorted other stuff since. Right now, I'm studying all I can, while working and trying to earn/save extra $. We decided to wait until spring, and if we're too far away financially, I'll sell my motorcycle. 

As for the other part of my question, are these hard/private lender sites usually reputable?

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