100% Cash down on a fix and flip to avoid financing costs???

8 Replies

I'm currently in the education phase here and had an idea that I think is good, but not sure...

Hypothetical situation: While in the early stages of my investing career, with little track record to approach private lenders with, having $150k to start with, could it be a good idea to find a $120k property, pay cash, spend $20k on rehab, and sell at $170 ARV as quickly as possible?...thus maximizing profit by avoiding having to deal with a lender or pay the costs that go along with financing. This would give me an advantage because I could break the 70% rule (this deal comes in at 82%), allowing me to buy properties that other investors wouldn't touch because they need to account for financing costs.

My initial thought was that this is a bad idea because it ties up a lot of cash and would limit my exit strategies to just one: fix and flip, but I think that's not true, because I could always finance 80% of the appraised value and turn it into a cash flowing property by renting or lease option.

As always, the money is made when you purchase, so I would have to do the due diligence to ensure that the fallback option is truely viable. But, assuming Plan A (fix and flip) works, this seems like a nice way of reducing work and maximizing profits in my side hustle. While growth may not be as explosive as it would by doing as many deals as possible with the money available, this seems like a rather efficient way of going about it. Also, I initially thought that this is not vary scalable beyond a certain point, but I think that is also incorrect. The big players do exactly this all the time, the larger scale simply involves a bigger team.

Thank you for any response/correction!

Cheers

Tony

Being an inexperienced investor you should be more conservative. Dont think you "beat the system" by paying cash for properties and getting a better return. Experienced investors evaluate cash on cash return and many other metrics. 

Thanks for the quick reply!

Concerning being conservative, if it ended up being a bad deal and I lost, say, $5k on the deal, it doesn't matter whether its 100% my money or 3.5%, I still loose $5k. I think being conservative is would be my MO regardless. It shouldn't matter whether or not its my money.

What, in your opinion, could "more conservative" look like if I were to start with $150k?

Thank you again!

To invest $150K, as a rookie, you are in Colorado Springs.

Think about being a private lender at 10% for rehabbers, no more than 80% LTV, no more than 90 days.

See your REIA president about being a Private Lender.

I am not an experienced investor.

But I have had some experience with my 2 SFRs for 7 years and 2 years each.

When I had a vacancy of upto 4 months, I didn't break a sweat paying the expenses (utility, insurance, property tax) for that period. Why? Because, I had no mortgage left on that property.

Others have said that it is better to get financing than paying cash, even if you have the cash yourself. Reasons stated were:
1. Avoiding putting all your cash into one deal, in case you need that cash for anything else.
My answer : I have family emergency reserves. The cash I want to put is outside that reserve. Really good deals are few and far between.

2. You will lose the mortgage interest write off
My answer : I dont want to pay $10,000 in interest expense to a bank, in order to avoid paying $3500 in tax expense to the government

3. You are not letting other people's money work for you
My answer : This is the same point as number 2 above

4. If you have a 4% interest rate on your mortgage, but making 10% return on your investment, you are doing well.
My answer : Having a 0% interest rate and making 10% ROI on that same propert is better.

Bottom-line:
First, I should find a deal (and not focus on wether I would pay cash or financing). The deal should meet or exceed all of BP's calculators, savant's sage advice for ROI, Cash-on-Cash, etc., smell test, etc.
If I have $150K in reserve cash, but find such deal that requires more than I have cash, then I would finance it.

Using your own cash has costs too that should be considered. It's called opportunity cost. Like @Brian Gibbons pointed out, you could lend that money out and make 10%. Your cost of doing your own deal with your own money is really 10%. So after you do one of your 82% deals you really lose that 10% on that deal so while your bank account may grow you might actually end up gaining less than you would have going the other route.

@Tony Hill I do agree that it would be safer in that it gives you more room for things to go wrong but don't settle for a mediocre deal because you have cash. You should get a better deal because you have cash. Once you wrap your head around that, you will be one step closure to successfully investing.

If you have the cash available and are a little short on the experience. You could partner up with someone that has done real estate investment before. There are many industries that ambitious people want to get started in, but they make costly mistakes. Chances are if you team up with someone, they have made those costly mistakes and know how to avoid them. Just my opinion.

@Tony Hill Many investors fund at least some of their own deals once they can afford it.  Ideally, it only means being able to take slimmer deals when juicier opportunities dry up.  There will always be gotchas so you don't want to trim your margin too much--believe me, I've made that mistake.

As @Bill S. implied, you can think of it as lending to yourself at 10% or whatever funds would cost you.  But again, in order to pay yourself 10%, you'll need a healthy margin.  The benefit is your lending to someone you trust and borrowing from someone who isn't going to get draconian with you if things go wrong--yourself.

I've funded my own deals with a HELOC. In my area, depending on what I have in my pipeline, I'll take a deal that is 75% ARV minus repairs.

Thank you all!  This has been really helpful.  This is not my situation (yet), but I am on track to get there in a couple years.  

@Brian Gibbons and @Bill S.   This concept is what my ultimate goal actually is, but I didn't realize/remember that it could be done on a shorter timeline.  I had known that I could get 10% annually by lending to investors, so I figured I would have to work hard to get up to at least $400k-500k before going that route, but this opens up the possibility much sooner.  As far as opportunity cost goes, with all the free time I would have by simply being a private lender, I could probably make up most of the difference while pursuing my passion (photography) and bringing in some income from that - not to mention the nice quality of life boost.

The one big thing I didn't mention is that I definitely do want to become an experienced real estate investor, so, at the moment, I see myself implementing a hybrid of these methods

@Jai Reddy and @Larry T.  Your points are right on with what I am thinking when considering doing self-funded deals.  I fully understand that this does not allow me to get sloppy.  I have to really make sure it is a deal and only slim my margins a little.  75% sounds reasonable for sure.  So, I will continue to educate myself, and I will pass each deal through local investors, the collective mind of BP, objective tools like the BP calcs, and the boss.

Cheers!

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