I feel lost and naïve

[Kevin Kirby]

I’m working on a fix and flip deal and the biggest obstacles I’m running into are on the financing side. ( I feel pretty Naive and frustrated)

Every hard money lender I’ve talked to wants me to bring a decent chunk of cash to closing (down payment, points, and closing costs).

That’s tough because I’m trying to minimize how much I have out of pocket going in. I’ve always heard the hardest part is “finding the property”. Ive found the property. Now that I found the property I keep hearing contact a hard money lender with no money down blah blah blah and it’s clearly not the case. Books and content creators are all saying they are able to do it with “$0 money down” or “0 out of pocket”

I’ve also heard the loan is based on the “strength of the deal” not your credit score but yet they want my credit info.

 I believe I have a great deal with a pretty big margin for a fix and flip. Stay with me!

On top of that, the rehab funds aren’t given upfront. Instead, they’re held back and only reimbursed after I complete work and get it inspected. That means I’d have to float all the construction costs myself first, which is a big cash flow issue for me.

Then there are the interest-only payments. They start right away during the rehab period, which adds pressure to get the job done quickly and sell fast. If the project drags out, I’m on the hook for those payments even longer.

I’ve tried negotiating terms to roll more of the upfront costs into the loan, but so far lenders haven’t been flexible.

Between the upfront cash, the reimbursement setup, and the ongoing payments, I’m worried this deal might eat into my profit margin or worse, put me in a bad spot if rehab goes over budget or takes longer than expected.

Has anyone dealt with this before? How do you structure financing so you’re not constantly out of pocket during a flip? Is it even a possible. They all say wow your numbers are great but I just don’t have the upfront cash required for the deal. It’s really frustrating when that the only thing in the way from making this happen.

Here’s some numbers:

201,995 list price (175-180k target price) 330,000 arv 40-50k rehab

And I can’t get the deal financed 🤦‍♂️ any advice and sorry so long? 

[Patrick Roberts]

These are very standard terms. I'm not sure who told you that hard money lenders allow $0 down, but this is definitely not the case. I would expect a minimum of 10% down on the purchase plus closing costs, and likely more than 10% down if this is your first flip. 

Very, very few lenders are going to give a lump sum up front for the rehab in a situation like this (unless they are idiots). That typically only happens with highly experienced investors who have a deep history with the lender. Construction draws are to be expected. Same goes for monthly interest payments.

At a bare minimum, you will need cash to cover the purchase downpayment and closing costs, as well as cash to carry the property until it sells. Some lenders will finance the interest payments and escrow them for you in a hold-back, but understand that you are paying interest on interest if you do this. 

Flipping is not a $0 cash game. You need capital - just not all of it. HML/private lenders will typically float 80-90% of the costs for you. You need the other 10-20%.

One last thing- you mentioned the timing of cashflows reducing your profitability. On a deal like this, using your cash for a downpayment and monthly payments will only marginally impact your profitability. In fact, borrowing less should actually increase the total amount of profit, as you will pay less interest while all other costs stay the same. What this will impact is your liquidity, which it sounds like you dont have, as well as your return on equity. 

Your credit score and report will likely be considered by most lenders, especially at high leverage like what youre looking for. Most of your cheaper, high leverage HML products are instituational paper, which are going to behave more like bank underwrites than private lending. Another factor is the lender is seeing if you have another way out if the deal goes sideways - in the event that the flip wont sell, can you get another loan to pay off the HML.

Overall, it sounds like you might not have the cash or credit for deals like this. If you have the ability to find really good deals, partner up with someone who has the financial firepower to bring what your missing. If you think you have a really good deal but no one will partner with you, it's time to look internally - everyone else is seeing something that you are not seeing.