What costs should I expect to pay out of pocket?

Question

Hey!

I'm Uks, a 29 year old architect in Namibia, Africa. Because of my technical knowledge and the fact that I have designed and supervised construction of a few houses as a side hustle, I want to enter property investment through flipping.

Aside from the purchase price and possibly flipping costs which can be lent from hard money, bank or private lenders. What costs should I prepare to pay for out of pocket?

Arpan Patel · Answer

As far as first steps, first figure out how you like to equity or debt to be structured. On our rentals we offer 50% in exchange for them bringing the resources (cash and credit) to plug into our system. On the flip side we offer debt percentage because the risk profile - in my opinion - is too unfair for the investor. So first figure out what structure you are trying to set up. Second, figure out what roles need to be delegated. For instance, for our rental business, we find the deal, manage the rehab, property manage, and manage the refinance and the whole financing pathway and the investor brings the resources. Also think about how to unwind the deal if necessary; this is much more important for equity partners then for debt partners. What is someone wants to back out or has to due to medical issues, death, divorce, etc. How will you unwind the deal basically. After that, you can approach an attorney and draft those parameters. Then talk to your investors and they will probably have some items that want clarified added or omitted and come to an agreement. The note is apart of the conversation after you get the operating agreement in place about how that business will run, how is doing what, who is bringing what, and how to get out of the partnership should there ever be a need. I would show this to the investor only after they looked over the terms of a specific deal and want in to the structure you suggested. Then you can talk about how to take the next steps with an operating agreement, corporation structure, and all. I hope that helps.

Arpan Patel · Answer

You will also probably need some document work from a lawyer and some initial application fees to Hard Money Lenders. You may also need some funds for incorporation. If you are getting private money loans as well you will need some funds to get an attorney to draft you a promissory note document as well. If you are taking on partners then you will need an operating agreement - most Hard money lenders want to see your operating agreement as well. Then there are some state specific stuff you may need but you will only know that as you move forward. Cost for getting started in IL are about 300 for filing fees for corp, 1000 for operating agreement, 500 for promissory note, 1000-2000 for initial application fees for Hard Money Lenders, depending on how you write your contract you will need Earnest Money for the deal you lock up, and lastly you may need to get a survey as well which can run from 250-450. You may or may not need a survey because the seller can provide that, or your lender may not require that but something to consider. This is all for single family mind you and it may vary from state to state. I was just quoting what I know IL start up costs to be. I hope this helps!!

Peter Mckernan · Answer

Hello @Ungwang Boiteto

I would say for other fees to be incurred you’ll be looking at closing costs for a property (2%-5%) in closing costs for total sale price. If you are going through an action online you may have to pay for the auction commission. If you are going to look for 90% leverage you will need to look at private money because a lot of hard money lenders will not lend more than 70% especially on the first deal.

Before the work is done, or even starts you will be giving the downpayment ($200,000 home) 70% LTV would be $60,000 out of pocket by you or your investor. If you have a friend/partner that is willing to put the money down then you can work as the PM for the project? That could be your sweat equity side of the work/money.

Alexander Zurn · Answer

@Ungwang Boiteto welcome! You've come to the right place. My knowledge on flips, costs, hard money, etc. is limited at this point in time... HOWEVER, if you haven't already, you must read The Book on Flipping Houses by J. Scott. It is considered to be the best book on flipping ever written and is a favorite of this site. It breaks down every single step to house flipping and probably has a specific chapter on out of pocket expenses, which you could just flip to and review if you wanted. Good luck

Peter Mckernan · Answer

Hello @Ungwang Boiteto

Welcome to the site! As you pull a hard money loan the expenses from the loan normally will be a higher rate for the interest (10%-18%) and usually you will be paying points on the loan amount (2-10 points). Check out the BP link below to help you with other aspect of loan requirements and costs.

https://www.biggerpockets.com/renewsblog/2008/02/2...

Peter Mckernan · Answer

You are welcome! Good luck! @Ungwang Boiteto

What costs should I expect to pay out of pocket?

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