Why do flippers not use their own money if they have it?

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Why do flippers not use their own money if they have it?

Abigail J Steinert
Architect · Wichita, KS · Member since 2021 · 12 posts · 4 votes

I keep hearing on the podcast that house flippers always tend to use other lenders, hard money, etc... Even in J Scott's book on Flipping Houses says that they use investors and don't really use their own money.

What I want to know is why. I would think you would want to use lenders in the beginning but as soon as you have enough capital from successful flips, you use your own money and reinvest.

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Trampas Tanklage
Real Estate Agent · San Antonio, TX · Member since 2020 · 63 posts · 37 votes
5y

A few thoughts on hard money:

-Using a hard money loan vs straight cash can triple (or greater) your CoC ROI on a flip

-You can expand your options to higher price/ARV ranges with a greater spread

-If you have a GC you like (or are a GC and need to keep your subs busy) you can use leverage to get into a few projects at a time, which keeps your crews happy

I'm not a lender or affiliated with any. It does baffle me why some flip investors insist on only buying with their own cash. 

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    When you use your own money, it is a cost to you,  When you use someone else's money, it is a cost to them.  You NEVER want to use your own money if you can.  Anything that comes out of your pocket, is a cost to you.  The more money you spend out of your pocket, the more expensive, and higher the cost, of the property in question.

    2Reply
  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    5y

    Well, they could be using their capital to make other purchases, for reserves, etc. Or, they could be lying about how much cash they have.

    2Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    5y
    Originally posted by @Abigail J Steinert:

    I keep hearing on the podcast that house flippers always tend to use other lenders, hard money, etc... Even in J Scott's book on Flipping Houses says that they use investors and don't really use their own money.

    What I want to know is why. I would think you would want to use lenders in the beginning but as soon as you have enough capital from successful flips, you use your own money and reinvest.

    I've always wondered the same thing.  If they've flipped so many houses and made so much ordinary income,  why pay the fees and go through the pain and risk of raising capital and taking on partners. 

    I guess subconsciously they realize flipping is a job. Who wants to pay to have a job.   

    1Reply
  • Ryan Herting
    Lender · Philadelphia, PA · Member since 2020 · 139 posts · 103 votes
    5y

    Hey @Abigail J Steinert & @Steve Vaughan, 

    to answer some of your questions. When someone is an avid flipper, they usually have trusted capital partners if not a few great relationships where that pain and risk are very much reduced. Also, I would love to clear up the stigma that obtaining capital partners is painful and risky, which is in fact not the case. Just finding the right partners is difficult. 

    The following will elaborate on the above and answer more of your question. 

    See, it's an even bigger risk to have your money tied up in a deal than to pay some fees and interest on capital you are lent. Yes, you might lose out on a couple of grand here or there, but this is also a business that requires speed, and having a lot of your capital tied up in one deal will slow your scaling process. 

    To add, when it comes to most lenders, they will want you no have some equity in the deal. With that, you are going to need that liquid cash. If you waiting for the return/to pull that cash out from another deal, you're going to lose time and most likely money.

    I hope that answers your question. I can go into more detail, but this is basically the reason.

    3Reply
  • Jo-Ann LapinPro Member
    Loan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
    5y

    Leverage helps you scale up. Finding loans that don’t have any pre payment penalty for a fix and flip is important .

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    4Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    5y
    Originally posted by @Ryan Herting:

    Hey @Abigail J Steinert & @Steve Vaughan, 

    to answer some of your questions. When someone is an avid flipper, they usually have trusted capital partners if not a few great relationships where that pain and risk are very much reduced. Also, I would love to clear up the stigma that obtaining capital partners is painful and risky, which is in fact not the case. Just finding the right partners is difficult. 

    The following will elaborate on the above and answer more of your question. 

    See, it's an even bigger risk to have your money tied up in a deal than to pay some fees and interest on capital you are lent. Yes, you might lose out on a couple of grand here or there, but this is also a business that requires speed, and having a lot of your capital tied up in one deal will slow your scaling process. 

    To add, when it comes to most lenders, they will want you no have some equity in the deal. With that, you are going to need that liquid cash. If you waiting for the return/to pull that cash out from another deal, you're going to lose time and most likely money.

    I hope that answers your question. I can go into more detail, but this is basically the reason.

     As a listener and small time investor I understand where Abigail is coming from.  To hear the podcast or read in a book the advice of large volume, large business flipping, borrowing or partnering unnecessarily is a foreign concept to us. 

    When the avg Jack or Jill flipper goes out to seek capital or partners for the first time,  risks of getting screwed or screwed over are very real.  Until established and experienced, seeking capital, to me, poses a much larger risk than using your own money. You'll also be more careful and more creative with your purchase. 

    As a lender, rationalizing that borrowing lowers their risk makes sense. A barber doesn't want a bunch of customers cutting their own hair. 

    From the perspective of the small or new investor that isn't trying to fund multiple projects all at once I'd like to see and hear advice about how to use your own capital effectively rather than just use OPM.  Too many pitfalls in shark-infested waters. 

    1Reply
  • Jonathan GreeneBusiness Member
    Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
    5y

    It's all about how your money works for you. If I have a giant chunk invested and am making a 20-40% return, why would I withdraw that cash, pay capital gains on that, just to flip when I have other access to money via a line of credit or traditional financing. If you take all of your cash and use it to flip, you only have your cash and skills working on one thing at a time. If you keep you cash pumping and use smart leverage and diversify what you own, all of your money is working for you in different sectors at the same time.

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  • Trampas Tanklage
    Real Estate Agent · San Antonio, TX · Member since 2020 · 63 posts · 37 votes
    5y

    A few thoughts on hard money:

    -Using a hard money loan vs straight cash can triple (or greater) your CoC ROI on a flip

    -You can expand your options to higher price/ARV ranges with a greater spread

    -If you have a GC you like (or are a GC and need to keep your subs busy) you can use leverage to get into a few projects at a time, which keeps your crews happy

    I'm not a lender or affiliated with any. It does baffle me why some flip investors insist on only buying with their own cash. 

    5Reply
  • Michael Kinsella
    Lender · Member since 2018 · 617 posts · 275 votes
    5y

    @Abigail J Steinert

    Most often it's a matter of leveraging one's capital.

    Below is a simplified example of why one might use OPM (Other People's Money) to finance his or her projects.

    Let's say that you have 100k, and it costs 100k to do one project (along with several other 100k projects in your pipeline).

    Let's say that you have a lender who is willing to offer you 80% of the project cost on each of the projects in your pipeline.

    You can do 1 project with your own money, or you can do 5 projects simultaneously using the lender's money.

    Using the lender's money (leverage) is a way to scale much faster in flipping.

    Hope this helps,

    Michael

    0Reply
  • Cody Neumann
    Rental Property Investor · Surprise, AZ · Member since 2020 · 405 posts · 179 votes
    5y

    @Abigail J Steinert

    Most experienced investors will look for other sources of cash to pay for the deal such as partners if they are structuring and managing the deal as a way to fund more deals and make more money.

    It is totally acceptable to get a loan on the property if you are just starting out as long as the bank will lend on it.

    Some flips can require extensive repair that a bank will not fund on so investors will need another source of payment.

    0Reply
  • Ray Evans
    Flipper/Rehabber · Member since 2020 · 57 posts · 36 votes
    5y

    @Abigail J Steinert I have the exact answer as I have just gone through this.I am a rehabber,I found a great property although it is"rural"I used my HELOC and some cash about 85k and have missed out on 2 fantastic deals.My HELOC and CC debt run down my credit score etc etc.

    That is the reason!Best of luck.

    0Reply
  • Jim K.
    Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    5y
    Originally posted by @Michael Kinsella:

    @Abigail J Steinert

    Most often it's a matter of leveraging one's capital.

    Below is a simplified example of why one might use OPM (Other People's Money) to finance his or her projects.

    Let's say that you have 100k, and it costs 100k to do one project (along with several other 100k projects in your pipeline).

    Let's say that you have a lender who is willing to offer you 80% of the project cost on each of the projects in your pipeline.

    You can do 1 project with your own money, or you can do 5 projects simultaneously using the lender's money.

    Using the lender's money (leverage) is a way to scale much faster in flipping.

    Hope this helps,

    Michael

    Here in western Pennsylvania, I really want to meet the guy who's got five flip teams he trusts all going like the hammers of hell at the same time.

    2Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    There's a huge difference between total cost and your cost,...or at least there had better be.

    0Reply
  • Nicholas Chapman
    New to Real Estate · Wilmington, NC · Member since 2021 · 3 posts · 3 votes
    5y

    @Joe Villeneuve fair response, but why pay 12 percent and 2 points on money you could have used without interest?

    1Reply
  • Alexander Hogarth
    Illinois · Member since 2014 · 49 posts · 15 votes
    5y

    @Abigail J Steinert I persoanlly use loans for rehab projects because they are asset based - so that means you can take on as many loans as you have deals.

    If you exclusively use your own capital, then you are limited to the number of projects you can personally fund.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y
    Originally posted by @Nicholas Chapman:

    @Joe Villeneuve fair response, but why pay 12 percent and 2 points on money you could have used without interest?

     One step backwards to take a giant leap forwards.  Forget the percentages.  They lie.  What would the comparison be in dollars between paying all cash for a deal, and using that same money on multiple deals?

    If you had $100k to work with,  3 options:

    1 - Buy all cash
    Property cost    $80k
    Rehab cost         20k
    Total Cost        $100k
    PV after Rehab $150k
    Profit               $50k

    2 - Use 70% HML = 2 pts/12% (3 properties like Option #1)
    Cash                 $30k
    HML                    70k
    HML Cost             10k
    Total Cost        $110k
    PV after Rehab $150k
    Profit                 $40k (per property)
    x 3 properties   $120k profit

    3 - Use 70% HML = 2 pts/12% (1 properties with cash as DP)
    Cash                $100k
    HML                   333k
    HML Cost            102k
    Total Cost         $535k
    PV after Rehab $700k
    Profit               $165k





    1Reply
  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    5y

    Cash is King! I rather keep my money on hand if I have the ability to do so. What if something happened to the housing market or you got yourself into a bad deal? Would you want all your cash tied up? If you pay for half of the house in cash and end up foreclosing they take the whole house! 

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    5y
    Originally posted by @Ray Evans:

    @Abigail J Steinert I have the exact answer as I have just gone through this.I am a rehabber,I found a great property although it is"rural"I used my HELOC and some cash about 85k and have missed out on 2 fantastic deals.My HELOC and CC debt run down my credit score etc etc.

    That is the reason!Best of luck.

     This is the best reason I've seen so far.  It was more likely when the market was balanced, but I agree opportunity reserves / dry powder should be kept on hand. No brainer deals aren't exactly falling from the sky these days though.

    But at the same time, I haven't missed an opportunity because I was out of dry powder.  Long BRRs with large capital outlays I never bothered to refi.  Had to get really creative, but haven't missed.  Don't accept steep/expensive/risky terms that require LLCs and other crap just for FOMO on the proverbial next homerun deal.  

    0Reply
  • Shiva Bhaskar
    Investor · Los Angeles, CA · Member since 2017 · 523 posts · 476 votes
    5y

    I think there are a few reasons. One is that money is cheap right now, so they can use someone else's money, and put their own to work for something else.  Another, and this is not one flippers like to discuss, is that if the project goes south, the risk is on the lender more than them. They might offer personal guarantees, but still. 

    Another situation is flippers who are involved in many projects. It's hard to fund 4 or 5 projects at once, all on your own. You might hypothetically do it if you have capital, but it can be tough. So, use other people's money 

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