My financing strategy

20 Replies

I wanted to get the community's thoughts on my financing strategy. It is as follows:

-Getting a $25,000 home equity loan through credit union.
-$25,000 loan will be used for money down on hard money loan.
-Hard money loan terms are 12% plus 4 points. Requiring 10% down.
-Hard money lender will loan 70% ARV.
-Hard money loan will fund acquisition and rehab costs.

This is my plan to get the ball rolling on my quest to be my own boss and become a full time investor. Got to start somewhere!!!!

Forgot to mention this is to fund fix and flip deals in Baltimore County, MD. For now now, all profits will be reinvested back into capital reserves.

what type of investment are you trying to do? That sounds like a super expensive way to get started. Do you own a personal property? Can you out 20% down on a pure rental? I am the investor who loves debt that seems frighten fully a lota lot

Forgot to mention this is to fund fix and flip deals in Baltimore County, MD. For now now, all profits will be reinvested back into capital reserves.

The goal is to be in and out in 90 days.

Originally posted by @Todd S. :

The goal is to be in and out in 90 days.

 Do you have a plan to get out in 90 days?  Like @Elizabeth Colegrove says, this looks expensive to start out. It isn't the actual cost of the HML...it's the idea that it is called a loan in the 1st place...it isn't.

Hard Money is a rehab expense, just like the kitchen, the floors, and paint.  The cost of the painting might be $2000.  The cost of the HM is 1%/month + 4% origination.  That gives you a defined cost of the cash.  The problem isn't the cost of the cash...the problem is when the HM "cost" turns into a loan, as in your 90 days becomes 120 days, then 150 days, then....??

So, I ask again, "do you have a PLAN to turn this over in 90 days"?

The term is for 12 months, but my strategy is to not hold a particular property for that long.  I plan to flip my first property in 3 to 4 months.  Once the property is sold, hard money gets paid back.  Am I looking at this correctly?  I know this is not an ideal way to do business, but I am trying to start somewhere.  I feel as though there will still be room for profit.

You're right on the money (pun intended). 

The real trick is going to be to account for that HML expense - which is a perfect analogy by Joe V in terms of how to think of that HML loan.

Its going to be extremely difficult to find deals that will have a large enough profit margin in them when including the HML fees/interest.

And if the house doesn't sell in 3 months, then your profits are going to go right over to the HML.

Still, if you can find something with the margins, then why not. Its likely going to be far cheaper than partnering with someone 50/50 on a deal.

Lets say you find a 200k house that you're going to be all in at 140k (70% ARV). Your HML charges you 4 points and 12% interest only. You sell the house in 6 mos for 200k exactly and, after closings costs and realtor fees, you make 40k of profit.

Scenario 1 with money partner - You have to give them 20k of the profits.

Scenario 2 with HML - You pay them 4 pts on the 140k loan (5600) and interest for 6 months (1400 x 6= 8,400). Total payout is 14k.

You saved 6k by using a HML over a money partner.

If the house sells in 3 months, you save yourself 9k. But if it takes a year, you end up paying the HML 22,600.

The key with using a HML to do the deal is to:
1) Get in and out quick.
2) Find a deal that has a big enough spread to pay the HML and still hit your target for profit.

What you'll have to keep in mind is that there are probably going to be other investors with all cash that will look at the HML fee as additional profit and a larger return on their money. And they are the ones that are going to be hard for you to beat on an offer.

On that same deal above, an investor with all cash could pay the 140k for purchase and rehab. Sell it and make the same 40k in 6 months. Thats a COCR of a little over 28% over 6 months. But on an annualized basis, thats actually 56%. They may not need to make that much of a return on their money to be happy so they are going to be in a position to be at 150k all in.

Makes it real tricky to compete on offers with other investors when they have the deep pockets. Not saying it can't be done. But it will be harder to flip when adding in the HML fees.

But I would still pursue it. You will find some deals that the numbers work. And when you do, you'll be tickled pink. :-)

@Todd S.,

I don't see anything wrong with your strategy, in fact I know of a local lender who might be of help to you. Reach out via colleague request and I will supply contact information. 

As some have mentioned, it's expensive, and finding that first deal will be a challenge, but far from impossible in Baltimore County. The expense is your tuition as a beginner. As you develop a track record and relationships, money will start to flow to you and will cost less. Be prepared, it's a lot of work, don't let anyone tell you otherwise.

Are you interested in staying close to the Middle River area? Have you thought about how you will identify your first deal? 

I suggest you attend one or two local REIA meetings (BWI Meetup, Real Deal Meetup, Baltimore REIA, etc.). You might stumble upon something or someone who could get you on track.

Best of luck,

Nancy Roth

@Todd S.   a couple of points to consider

If all of your money and credit is tied up in the first deal what if you have cost overruns? Make sure you have enough in reserve to cover a cost over run. Renovation loans are done on a draw schedule. You get a certain amount of work done and the HML gives you more money. You have to have ample money to gt to the next draw. It is possible to get into a situation where the HML is holding more money to finish the project but won't disburse it to you because you haven't gotten far enough with the money he already has given you.

In and out in 90 days is not going to happen on your first deal. Keep in mind if it takes 30 days to get a contract and 30 more days to get to settlement that is 60 days right there that many new investors don't even think about. Good luck - Ned

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

Thank you everyone for your input.  All great points to take into consideration.  I am aware that Hard Money is not preferable, but with no other options to get started I am willing to make it work.  I am thinking that implementing this strategy is better than not doing anything at all.  

@Mike H., Your way of thinking is where my train of thought is.

Well go at it! - but have a plan with the costs based on a thorough SOW. Your plan and its execution on budget and on time will be essential for your success. One thing that makes the first deal tough is the planning is all new to the investor. Also remember if you have to get various permits for the rehab work, that might be down to the contractor and it can slow a job right down way more than you had expected. 

If you go the hard money route on any deal between $100 - $350k assume it's going to cost you about 10% of the Retail Value of your product assuming 6 months borrowing plus the cost of Realtors and closing is going to run you another 7% which means if your deal is solid and runs according to plan with a full price sale, you need to clear 17% "offa da top" which in this economic environment can be done and the guy who pulls this off with a decent profit for themselves on the first deal is definitely a player.

We make our own luck in this business!

Your success will hinge on how well you know your market and how well you understand your costs. If you don't know these and don't have experience. you should not do the deal. your HML should vet this deal.

No. Barring additional info, my personal take is that the strategy you outlines isn't very good to start with.

It's hard to give you a full answer without a better understanding of your full situation, but I'm assuming that the 20K home loan is the bulk of your liquid reserves.  If I'm wrong, and you have 50K sitting in cash for a rainy day - good on ya.  And ignore this post.

But, assuming that you don't have another 50K sitting around, this is the type of deal that can bankrupt you as there is simply zero margin for error.  

@David T.  's 17% is pretty accurate.  When you combine this with things like rehab overages (which are common practice), the money left over for you, from a normal deal, is minimal.  But that's not why I'm worried.

I'm worried because of how stretched you sound to be financially.  If my read between the lines is correct, this one deal has a good chance to lead to bankruptcy.  If you double your rehab timeline, your rehab budget, or your comps are off by 10%, or the market takes a turn, this can wipe you out financially - and without a job.  

I know that you want to be your own boss.  And I know that you want to get into RE.  I just think that you need to find another avenue to do so...  Maybe up your reserves.  Maybe find a partner.  Maybe work for an experienced flipper.   

Happy hunting.

20k

Originally posted by @Jeremiah B. :

No. Barring additional info, my personal take is that the strategy you outlines isn't very good to start with.

It's hard to give you a full answer without a better understanding of your full situation, but I'm assuming that the 20K home loan is the bulk of your liquid reserves.  If I'm wrong, and you have 50K sitting in cash for a rainy day - good on ya.  And ignore this post.

But, assuming that you don't have another 50K sitting around, this is the type of deal that can bankrupt you as there is simply zero margin for error.  

@David T.  's 17% is pretty accurate.  When you combine this with things like rehab overages (which are common practice), the money left over for you, from a normal deal, is minimal.  But that's not why I'm worried.

I'm worried because of how stretched you sound to be financially.  If my read between the lines is correct, this one deal has a good chance to lead to bankruptcy.  If you double your rehab timeline, your rehab budget, or your comps are off by 10%, or the market takes a turn, this can wipe you out financially - and without a job.  

I know that you want to be your own boss.  And I know that you want to get into RE.  I just think that you need to find another avenue to do so...  Maybe up your reserves.  Maybe find a partner.  Maybe work for an experienced flipper.   

Happy hunting.

I'm not as stretched as you described, but I do appreciate your comments and concerns. 

Great - glad to hear that.  To clarify, the model you described is expensive, but feasible.  It's just risky as well.. :)

It is expensive, however I am confident in my numbers and the market I will be investing in. All profits will be reinvested in capital reserves in order to eliminate the hard money for future investments. I have consulted with other investors in my area, who started the same way. Like I stated earlier in this thread.....you got to start somewhere.

I really appreciate the way people on this site try to look after each other. Thanks everyone!!!

@Todd S.  I agree with @Jeremiah B.  and I have to say something. I took a significant loss on my fourth fix and flip last year and I wish I had done things differently. I took a hard money loan as a first and borrowed money from a couple of friends to make up the down payment and rehab on a high end flip. I was confident about my numbers but the market softened up, I discovered that the property had a major flaw for the buyers in that market (the property backed up to a relatively busy street), and I didn't have the capital to withstand a longer than expected hold time. (Thankfully, I have a bunch of equity in some rentals I own but I have to take a break from rehabbing for a while.)

I've learned the hard way that you can do everything you can to mitigate your risks but you can't eliminate them. I would have been better off sharing the risk and the profit by having my friends or another investor as equity partners instead of debt partners.

I would suggest that you partner up with someone on your first few deals first and share the profits (and the risks) on your first few deals before using your HELOC and risking your personal finances. Once you really know what you're doing, then start using more of your resources. Just my opinion :)

BTW, is it possible to do better than 12% and 4 points in your market? Going rates in my area have come down to 10% and 2 points. Maybe you can get better rates if you shop around.....

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