Cash vs Hard money?

Question

Do you prefer to buy fix'n flips with cash or hard money? Why?

Gall Davidovitch · Answer

I am a majority used to purchasing fix and flip properties with hard money loans and combining them with a business line of credit and credit card funding for rehabilitation. because it makes my real estate investments offer a more balanced blend of leverage, speed, flexibility, and risk management. It's a strategic way to maximize potential returns while maintaining control over your investment and cash flow.

Good luck with your investments

Kevin Sobilo · Answer

@Will Samuel, I'll speak to the opposite view as @John O'Leary even though he made perfectly good points.

Many is not most investors are small time operators. Most will never scale into a business doing dozens of rehabs a year. For the small time investor, managing a single rehab is a significant undertaking.

I prefer to use cash to buy and rehab properties and the main reason is "project management". A rehab is a "project" and with any project you have 3 main variables: Scope of Work, Cost, and Time. Inevitably issues will arise and when they do you can adjust 1 or 2 of these variables and work to keep the project on track.

So, for example, when you find a previously unknown issue that needs to addressed and you want to keep the Costs in line with your budget you can adjust the Scope of Work and possibly the Time!

If you use hard money loans, you have less flexibility with Time because those loans are expensive and affect your Costs but when you use your own cash there is no hard cost to the use of the money only an "opportunity cost". So, when you operate with cash you have more flexibility to manage the project and keep it on track with what you planned/budgeted. For a small time operator this flexibility is often important.

John O'Leary · Answer

Hey Will!

I personally think Using hard, private money, or creative financing for real estate investments offers significant advantages. Firstly, it allows you to quickly scale up your REI business by engaging in multiple projects or pursuing opportunities in a higher price range that may exceed available cash reserves. Take, for example, a $100,000 investment: with all cash, buying an $80,000 property and investing $20,000 would mean keeping 100% of the profits. However, leveraging this with hard money on four deals, even with an 80% return, results 320% return on the same $100,000. Alternatively, you could use the funds to purchase a $250,000 property for rehab, potentially yielding a higher return for equivalent effort. Choosing hard money also maintains liquidity, allowing you to stay nimble in the market and capitalize swiftly on good opportunities when they present themselves. Striking a balance between leveraging hard money and preserving liquidity enables investors to optimize their investment strategy. If the flip is more of a passion project and you have plenty of reserves you can save on costs going all cash.

Jacob Sherman · Answer

depends how much cash you have and if you're looking to leverage and scale . about 50% of your profits on a project go to closing costs and interest on HM loans so if you have cash but looking to borrow you have to do double the business for it to make sense

Erin Azar · Answer

I like cash and I like it to be mine (no partners). At least for your early fix n' flips. This was my choice for several reasons:

1) Making a mistake hurt, but it is twice as bad when it hurt someone else too.

2) I did not want an audience (critical partners) as I was finding my own footing.

3) I went into RE to be my own boss, so having a partner felt burdensome - not freeing.

4) In the past, I always took care of partners before me, if there was an issue. I knew I would make them whole before I took my cut, so that was already a loosing position.

Only now would I consider a partner. I am confident in my RE successes and have the resume to prove it. I would be able to craft a fair partnership and accept the roles that we agreed to. I would not have been able to do that in the beginning.

Hope this helps!

Ko Kashiwagi · Answer

Hi Will,

It really depends on your experience level and risk tolerance. If it's your first flip and you have low risk tolerant, buying all cash and refinancing sounds like a much smarter option.

Leverage is a strong tool but extremely dangerous. Once you've learned the process and gain confidence to run multiple projects, using leverage to scale the portfolio is a reasonable risk.

Jake Baker · Answer

@Will Samuel

With cash, you can
make higher margins per deal because you have less holding costs. With hard money, you
can make a better ROI because you are putting less of your own money into the
deal. Think ROI… Your return is lower, but your investment is much lower.

Why I use Hard
Money:

1. Higher ROI on my Money

2. I can keep more of my own
     cash in reserves in case something goes sideways.

3. A good HML will be on your
     side. Another pair of eyes to look at your deal.

4. Leveraging debt allows me to
     do more deals.

Hope this helps!

Mike Klarman · Answer

If you can scale with cash, then yes scale with cash.  Bite the bullet on the seasoning requirements and justify it by saving all expenses of a loan.  But it is hard to scale with cash, you need lots of it.  If you have 50k and you're looking to get started, there is a path to get started but cash deals is not it.  Even if you had 250k lets say, what can you do?  maybe two deals and that would drain all liquidity for 6+ months.

But having 250k with financing behind you means you can do 5+ projects at any one time.

Erik Estrada · Answer

If you have the cash to self rehab and purchase the property, go all cash and refinance with a DSCR loan.

This will help minimize your costs.

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