Newbie figuring out best way to finance a flip

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Newbie figuring out best way to finance a flip

Thomas Reiter
Kansas City, MO · Member since 2019 · 5 posts · 1 vote

Hi all, I am just getting my feet wet in the world of real estate investing. I want to start out doing fix and flips locally in my city (Kansas City, MO), and I'm exploring my options for financing my first project. After some research, it seems like my best option is going to be an ARM. I would like to do conventional, but unfortunately, I will not have the cash in hand for a 20% down payment. My second option seems to be refinancing my current home which is currently valued at 300k, but owe 250k, and use the difference to fund the project. My one concern about this option, however, is that I do have a successful flip, and I put the amount back into my current mortgage, would I be able to refinance again to bring my mortgage payments back down to the original? My third option, and really last resort, is a HML. This option worries me because of the interest rates, and the short term of the loan. I still have bills to pay, and a family to feed, so this option seems a bit too risky for me.

So, between;

-ARM

-Refinance current home

-HML

Any input or opinions would be helpful, or any aspects I may have missed, or might be ignorant to at this point. 

Thanks! 



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Dan BeaulieuPro Member
Lender · Knoxville, Tennessee (TN) · Member since 2016 · 422 posts · 667 votes
6y

@Thomas Reiter there is no way that a hard money loan is riskier than taking equity out of your primary residence. I’d definitely leave that alone!

A good hard money lender will help you succeed. They can look closely at the deal with a trained set of eyes, offer extensions if you haven’t sold the property yet, etc. yes the interest is higher, but it’s interest ONLY so your payments may actually not be much more. It’s a useful tool for buying good deals quickly and easily, and often getting up to 100% of purchase price and rehab costs funded.

As both a lender and an investor, I’ve financed my deals every way you can think of, and HM is still and always a great option on the right deal.

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  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    @Thomas Reiter, when you write "ARM" are you referring to an Adjustable Rate Mortgage? Not sure what you mean here.

    I wouldn't refi, because you don't have enough equity to pull any cash out. It's worth considering a HELOC. Some banks will got to 100% LTV, which could put $50k in your hand. The fees are much lower than a refi and you don't pay any interest on the money until you actually use it. You stop paying interest once it's paid back. It's a good way to keep recycling that capital.

    Don't be afraid of HML. You have to build the additional costs into your analysis, but if the numbers work, they work. An additional advantage is the second set of eyes they put on a deal. They're (usually) very experienced and won't lend on a deal that doesn't look like it will work.

    You can also look for private money. This is sort of the Goldilocks between conventional and HML.

    0Reply
  • Dan Krupa
    Real Estate Broker · Phoenix, AZ · Member since 2013 · 749 posts · 399 votes
    6y

    @Thomas Reiter - brother we need to talk. I assume you have a W2 job? Also, are you purchasing these flips in your name or the name of an LLC? We have done 50+ flips here in KC. I would recommend you get a LOC on your personal home. Then find a local bank who does commercial loans on residential property.(Need this to purchase as an LLC) There are a few that only require 10 to 15% down. 5.5% interest rates, less than 1 point for loan org, etc... They will fund the remainder of mortgage and then rehab. You can always use hardmoney but it is expensive. Money isn't the hard part of this game. At first, it will be finding the deals and then making sure you don't get ripped off by contractors/over flipping. We took a lot of lumps learning this game. Don't plan on making any money on your first one. Feel free to PM me. Happy to give some sage advice.

    0Reply
  • Thomas Reiter
    OP
    Kansas City, MO · Member since 2019 · 5 posts · 1 vote
    6y

    @Jaysen Medhurst, thanks for the reply.

    But yes, I am referring to an Adjustable Rate Mortgage. I will check out HELOC, I guess I had that backwards from refinancing. I was thinking HELOC had more fees and higher rates, but that's great to know. And as far as HML, I guess I'm still trying to understand how it would work, especially with it being a 12-18 month term. On a 50k property, I'd be paying at least 4K a month right? Or is it one large balloon payment at the end of the loan term.

    0Reply
  • James Bordeaux
    VT · Member since 2019 · 14 posts · 2 votes
    6y

    Hi Thomas,

    I borrowed against my Thrift Savings Plan to get cash- purchased my first house last April for $4,059.00. That's not a typo. I found a reputable contractor, but so reputable that I got ripped off (charged way too much for the renovations). 

    Borrowing from my Army Savings Plan was a good idea: barely any interest and auto paid from my salary. I spent some of that money to work with Fund and Grow (got me 63K in business credit-I paid 3k for the program). Used credit cards to pay for the renovations, my savings loan to cover holding costs. House is now for sale- 30K. I also have kids, bills and what not- send me a message Thomas, I'll give you a run down on my story. I just started last year. 

    You can trust, but verify. contractors are everywhere and there is no way of telling who is good or bad...Get 3 estimates! Take the middle and go! It is scary when you first pull the trigger! I mean, like nightmare scary, analysis paralysis! 

    1Reply
  • Thomas Reiter
    OP
    Kansas City, MO · Member since 2019 · 5 posts · 1 vote
    6y

    @Dan Krupa, I do have a w2 job, but I don’t want to forever, that’s why I’m here! But I will definitely PM you. 

    1Reply
  • Matthew Meikle
    Realtor · Jacksonville, FL · Member since 2019 · 76 posts · 42 votes
    6y

    Could you rent out your main house for cashflow and then get a FHA + 203k to house hack a 4plex?

    0Reply
  • Dan Krupa
    Real Estate Broker · Phoenix, AZ · Member since 2013 · 749 posts · 399 votes
    6y

    @Thomas Reiter - having a W2 opens up a world of great, cheap financing options. Let it help propel you at first. If you purchase in your personal name you can put as little at 3.5% down, for 30 years, and pay 3.5 to 4% interest. Some lenders are okay with you doing that and then quit claiming your rentals into an LLC. If you are going to flip, as you stated, you need to protect yourself. Lien releases, have an LLC, insurance, etc... Don't buy the properties in your personal name. Do what I recommended above.

    0Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    @Thomas Reiter, an ARM would still be a refi. I think you might be a little unclear on the different loan options. HELOCs do have higher rates than a refi, typically.

    Most HML is usually no longer than 1 year and interest only until pay off. So, if you were to borrow $50k at 10% with 2 points and hold the mortgage for a year, you would pay a total of $6k in financing costs. At the end you're paying all of the principle and the points. Your monthly payments would be closer to $425/month. Then when you refi or sell the property you would owe $51k ($50k principle and $1k in points). It's definitely worth talking to a few HMLs to better understand your options.

    0Reply
  • Dan BeaulieuPro Member
    Lender · Knoxville, Tennessee (TN) · Member since 2016 · 422 posts · 667 votes
    6y

    @Thomas Reiter there is no way that a hard money loan is riskier than taking equity out of your primary residence. I’d definitely leave that alone!

    A good hard money lender will help you succeed. They can look closely at the deal with a trained set of eyes, offer extensions if you haven’t sold the property yet, etc. yes the interest is higher, but it’s interest ONLY so your payments may actually not be much more. It’s a useful tool for buying good deals quickly and easily, and often getting up to 100% of purchase price and rehab costs funded.

    As both a lender and an investor, I’ve financed my deals every way you can think of, and HM is still and always a great option on the right deal.

    2Reply
  • Thomas Reiter
    OP
    Kansas City, MO · Member since 2019 · 5 posts · 1 vote
    6y

    @Dan Beaulieu

    I appreciate the insight. I honestly didn't know the payments were just interest, and not towards principal. This makes me feel much better. Also, knowing that they can offer extensions is a huge relief as well. HML sounds like it will probably be the best option. I will probably reach out to some local lenders and find out about my options.

    0Reply
  • Thomas Reiter
    OP
    Kansas City, MO · Member since 2019 · 5 posts · 1 vote
    6y
    Originally posted by @Matthew Meikle:

    Could you rent out your main house for cashflow and then get a FHA + 203k to house hack a 4plex?

    Unfortunately that isn’t an option. It is my and my wife’s first new construction, and I plan on keeping my family in this home for a while.

    0Reply
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