Financial Structure for Flips

6 Replies

Hello everyone. I am preparing for my first flip. I enjoy reading about individuals success on this site and plan on being an active member.

I haven't met with any banks yet but working on my financial model and trying to predict what I should expect for LTV.

My mom flips houses in South Jersey and typically puts down 30% with a local bank, so 70% LTV. She has successfully flipped 7-8 homes, so has a relationship with a banker and a proven record.

While I have no track record in flipping houses, I am trying to put down as little equity as possible using a local bank. I plan on meeting with 3-5 banks and seeing what the market is dictating.

Wanted to ask the group how everyone is financing deals in terms of capital structure? I'm also considering using outside equity from one or two friends.

My first target deal is:

Single Family Home

On market, short sale, foreclosed

Under ~$125,000 purchase

3 bed/2 bath

1200+ square feet

.15+ acres

South Jersey market

Target Timeline: Gut renovated property, exit in under 5-6 months.

Financial Structure: Ideally 75%-80% LTV, equity 50/50 between my partner and myself.

Sample deal we have been analyzing:

-Purchase $99,000 (made offer on a short sale, listed at $110,000)

-Renovation $40,000

-ARV (based on comps) $205,000

Meets 70% Rule: ARV 205,000 x 70% = $143,000 - repairs $40,000 = $103,000 purchase price.

Profit (accounting for holding costs/financing costs/etc): ~$40,000

The house is a 2 bedroom/1 bathroom right now. Its on a tree lined street, neighborhood I am familiar with and comps out ARC at $205,000 - $210,000. The basement is massive and will finishing it and adding a full bathroom will increase the livable square footage from 1300 to 1700.

Thanks.

Ask your Mom! She sounds like she is doing well and good source for information.

I have credit line (called a guidance line of credit) with local bank that funds most of my flips. I had only flipped 3 or 4 when I got in touch with them, but they were still willing to take a risk with me. Without somewhat of a track record, I think getting any sort of 'big money' type financing (like not hard or private money) will be really hard if not impossible, but probably still worth trying to find out more about local requirements for institutions in your area.

My credit line, as I said, is guidance line of credit that then has individual notes and deeds and trust underneath of it on individual properties that it funds. It's like 1-2 pts and then prime +1 interest rate.

Acquisition- 70%- based of lesser of purchase price or appraised value. Purchase price is always the lesser (duh) so it's always based on that.

That's it- no rehab costs or anything.

Recommendation: try to partner with your mom- use her financing sources- do a few with her (2,3,4) so you have a track record to show, then beat the street until you find a bank who will give you something like what I have. I had to call about 20 banks to find mine FYI.

@Jonathan C. Thanks for the advice. I have not applied for a mortgage so I look forward to meeting with different banks and becoming familiar with the process.

What sort of flips are you focusing on?

@Account Closed it wouldn't be a mortgage... it would be some sort of credit line product most likely. You can't get a regular 30 year mortgage loan on properties that need a lot of work.

Single family flips for the time being.

@Jonathan C. The local bank my mom uses gives her a renovation budget, usually in a few draws. That is really it aside from the mortgage. I'm not sure of the correct terminlogy whether its a credit line for the renovation or what.

I am planning on applying for a mortgage to purchase the property. I am not going to pay cash.

Originally posted by @Jonathan C. :

I have credit line (called a guidance line of credit) with local bank that funds most of my flips. I had only flipped 3 or 4 when I got in touch with them, but they were still willing to take a risk with me. Without somewhat of a track record, I think getting any sort of 'big money' type financing (like not hard or private money) will be really hard if not impossible, but probably still worth trying to find out more about local requirements for institutions in your area.

My credit line, as I said, is guidance line of credit that then has individual notes and deeds and trust underneath of it on individual properties that it funds. It's like 1-2 pts and then prime +1 interest rate.

Acquisition- 70%- based of lesser of purchase price or appraised value. Purchase price is always the lesser (duh) so it's always based on that.

That's it- no rehab costs or anything.

How can I structure a deal like this with private investors and calculate interest payments etc? 

Pavlos Kasselouris, Real Estate Agent in FL (#BK3270448)
(386) 898-6930

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