Working Capital (WCAP) vs. Seed Capital
From your experience is it more important to have working capital to pay for renovations or more seed capital to buy better properties. My goal is to flip a house and maximize the profit. I was advised that WCAP financial money is more important since flips typically go over budget.
@Account Closed This is a good debate to start. My recommendation is that it is more important to have seed capital for three reasons:
1. Seed Capital allows you to buy more expensive more profitable properties
2. It is harder to get Seed Capital than working capital. Most of the time you can use credit for working capital. However, because of how bank loans work, it is much more valuable to have the seed capital up front to use for the down money than for the construction money.
3. Seed Capital is fungible. This means if you do not use it for the down payment you can use it as working capital. So, seed capital serves two functions.
To add a new thought. Seed Capital has advantages if you can get it without having to record a lien as you have more options with traditional funding. Also, you might want to consider a HELOC for Working Capital (WCAP) so you only have to pay interested when the money is being used.
@Account Closed nailed it though, especially with his second point. Seed Capital is critical to getting started. Working Capital becomes irrelevant if you can't get started. Banks are going to expect you to put the first dollars into the deal before they will participate, so without seed capital to put down the banks won't consider giving you access to working capital. Unless you are well capitalized and don't need participation from lenders, then seed capital is the critical piece of the equation to get things going.
How much of your cash you allocate to seed capital vs. working capital really depends on how big a project you are looking to take on. I am always a believer that you hold some back as a reserve, so you put in the seed money, hold back a reserve, and whatever is left could be used as working capital (in addition to any lending).