Metuchen, NJ · Member since 2015 · 374 posts · 27 votes
Hello,
I would love to hear everyone's opinions and experiences funding flips...
If you had enough cash to finance the acquisition and renovation costs would you go that route?
While I understand the incentive of using financing, it takes both time and a lot of interest...
And traditional banks typically aren't interested in financing fix and flip properties.
Thoughts? Look forward to a great discussion!!
Depends what you're trying to do.. If you're looking to do a bunch of flips then you need a lot of money and your best off financing the purchase and using the cash for the reno and down payments. But if you do one here and there and aren't trying to scale and go crazy then use your money for one and roll it into the next when you're done. You'll save thousands on financing costs, ultimately increasing your return.
I agree with the other two as well. It depends on what your trying to accomplish. If you want to just do a couple flips a year to have some extra money to go along with whatever job you have now then maybe the cash route would be better. Trying to build a business in real estate I would suggest using OPM. I use none of my own money on my flips at the moment and only use my money on marketing at this time. If your numbers are right and you have great profits on your flips you can make ALOT more money than using your own cash on every deal. Wanna run a business and a lot of deals than OPM all the way!!
@Mike Flora are you involved in flips or buy and holds (as I know they are both financed very differently)? Obviously flips are seen as much riskier from the banks and a lot of flippers are forced the hard money route with interest rates hovering around 10%!
What avenue do you go for your financing?
I really hate the paperwork and making offers with financing contingency (as I know for a fact many investment properties will be lost due to this).
@Ben C. I have before yes. But thats because I usually have multiple projects going on at once. I paid 10% interest and had to put down 10% of the purchase and the reno amount. Again though, if you have enough cash to do it on your own and only planning on doing one at a time, then thats probably the best route for you at this time.
I use family/friends money at about 5% for repairs, closing costs and 10% down payment and private money for the rest of purchase price at 9% and 1.5 points at closing with no junk fees. I use this way for flips and if I were to make it a rental you could do it this way and refinance at 6 months and get all your money back if numbers make sense obviously. Or you could just use your own money on the down/repairs/closing costs and just the hard money for 6 months. It's all about the discount at purchase of the property. I look to make 30K or more profit per flip when all said and done. It took a while to get people to buy in to this. You have to network!!!! I'm trying to grow a business so I want as much leverage as possible.
@Kyle Doney yes cash certainly cuts down on the headaches at closing. The main thing in my area is the all cash offers have a much higher acceptance rate vs financing contingency offers (aka hard money).
@Kyle Doney have also been reading on Bigger Pockets and someone stated the following "On the other hand some of my clients are lucky enough to have the enough cash in the bank to buy the property ... but no plans to actually use it. They make an all cash offer then close with a Hard Money lender."
@Kyle Doney have also been reading on Bigger Pockets and someone stated the following "On the other hand some of my clients are lucky enough to have the enough cash in the bank to buy the property ... but no plans to actually use it. They make an all cash offer then close with a Hard Money lender."
That makes sense as well!
That's an interesting strategy. I'm personally planning to pay all cash for my first few flips since I'm only planning to have one or two going at a time. Then once I have my team in place and my system more streamlined that's when I'll start utilizing lenders and leverage so I can begin to scale.
@Brian Garrett Yes if you only want to do one at a time seems like the best way. A lot of people will you see if you look at the cash on cash % return it is much better using OPM. However, you can manipulate #s anyway you want. More deals more leverage more risk as well. Also, instead of one deal going well you need multiple deals going well. But I digress...
@Ben C. when starting out in the flipping business it might be hard and/or really expense to get HML loans because you're inexperienced in the eyes of a HML. With that being said, its NOT impossible but just know what you'll be up against. As the others have said, obviously its less expensive if you can use all of your own money because you'll save on the interest expense but as you start to scale your flipping business, you'll probably need to use OPM and leverage yourself.
If you're just starting out, I would use your own money for the first few deals. Start building relationships with local HMLs and don't be afraid to show them your finished product. The more experienced and reliable you are, the easier it will to be able to find the money!
@Christopher Giannino great points! So for flipping only options are HML or cash correct? Seems like traditional banks don't want to touch fix and flip loans with a 10 foot pole.
Just to add to what others have already said. It depends on what you want to do - and if you would like to leverage all your personal assets for a flip. It can be very dangerous to rely on only personal funds for a flip if that investment doesn't pan out. The big difference between your own money and lenders is the risk. You can risk your own money with a flip or risk a lenders money. HML or Cash are your best options for flipping - while most people squirm at the cost of HML, most flips are short term loans anyway, so a 10% rate isn't that big of a deal. Fee's are the lender's cut for assuming the risk - it's just important to make sure you are getting a deal that makes fiscal sense for your flipping investment. IE factor in HML fees as a part of your cost to flip, and make sure you run the profit you are comfortable with.
I mean I'm sure there are other "creative financing" ways to finance flips but I would probably say that HML or private money (money from family and friends) seems to be the most common way. Most traditional banks will not touch fix and flips, although that might be changing. I just recently saw that Finance of America is now offering a product for flippers. I have absolutely no idea how it works but I will provide the link below.
@Account Closed Thank you for through reply! The rates I am seeing by me is 9-12% with 1-3 points at closing. Fix n Flip up to 90% of purchase + 100% of construction and new construction up to 60% of purchase + 100% of construction. How does this compare to the product you offer?
@Ben C. You are very welcome. Those terms are pretty standard for hard money. You should typically fall closer to the 9-10% range and 1 to 2 points. Expect variance though as the property is the biggest qualifying factor for these loans. Anything that is a bit of a stretch or extra risk to a lender expect a higher rate or an additional point in cost. I usually do case by case pricing with my in-house private money lender for this reason. It's all about the property and the story of how you will make money and pay off the loan.
@Account Closed Just as an example how would you calculate an interest only 12 month loan of 400,000 @10%? What would the monthly payment be? Could borrower exit the loan after say 6 months and not be responsible for the interest on the remaining 6 months ?
@Ben C. Good question. $400,000 * .10 = $40,000 in interest. You would then take $40,000 / 12 = $3,333.33/mo payment for interest only. The direct answer to your question is to negotiate the possibility of an early exit with your lender. Exiting the loan early and avoiding those interest payments is a very common practice with HML as most HML's are designed for a shorter term. You would want to watch out for pre-payment penalties. It's important to understand why pre-payment penalties exist, the simple version is so that the lender can ensure returns on their loan. Most lenders will want at least 6 months of interest payments but it can vary quite a bit. If you suspect that you will be paying off the loan inside a stated pre-payment penalty period, you should almost always ask to buy out the penalty with additional fees up front. This is because the buyout is (or should) always be cheaper than paying the penalty.
@Account Closed got it! Lastly, how does the renovation $ draw work. I know with the big banks what they presented me was a no go because it was very paperwork intensive and frankly a pain in the neck. Inspections every step of the way and paperwork for myself and contractor to fill out (and 1-2 week waiting periods after inspections for contractor to be paid).
@Ben C. It can vary dramatically how that works from lender to lender. I admit construction/renovation distributions from a lender are not exactly something I am 100% familiar with. My investors will give you the as-is value of the property through an appraisal or BPO and use that figure to determine max LTV for the loan. For new construction, it will usually be the projected value with some added LTV restrictions to lessen risk. The monies are distributed at once, so this avoids the extra paperwork and delays in paying contractors.
Jaron Ulrich interesting. One lender I have spoken with will require me to front the money for the first draw and then be reimbursed (inspections all along the way). To me this is more hassle then it is worth and would just use cash to avoid dealing with all that BS.
Guess I need to keep searching to see if other HMLs release all renovation funds right after closing to avoid all of those hoops to jump through as you said some do...