I am about to start flipping (rehabbing). I am capable of rehabbing one house at a time with my own financing. If I am ever going to do more than 1 at a time, I will need investors.
I suppose I could offer a cash investor 12% APR or something like that. If my plans work out, I will get a few profitable rehabs under my belt, then start looking for cash investors. My question is.... what assurance do these investors have if things don't do as planned? If I can't give them 12% return on their investment, what will happen? Let's say the local market crashes and I can't sell the house for as much as I had planned. What then? Then, I'm in debt to them. I don't think I would give them the house because I would still need to sell it for as much as I could, leaving me with nothing to give the investor.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
9y
Patrick Philip You can ask yourself this, will you give me your money and i'll do my first flip, it goes good i'll give you 12%, if it goes down the drain I'll write you a nice sorry letter in a scented paper with whatever is left after all expenses are paid?
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
9y
There are investors and there are lenders. Investors (also called "equity investors") invest money, get a percentage ownership in the project and a percentage of the profits (or losses). Lenders lend money, get no ownership, but receive a fixed return on their loan.
An example of an equity investment might be someone investing 100% of the project funds for 60% of the profit. In this case, if the deal earns $20,000 in profit, the investor gets $12,000 of that profit. If the deal loses money, typically the investor eats the loss (though a smart investor might negotiate a split of the losses instead).
An example of a loan might be what you suggest above -- 12% APR for some fixed period of time. In this case, typically the house is used as the collateral for the loan, so if you don't have the ability to repay (for example, you can't sell for enough to repay the lender and can't come up with the additional cash on your own), the lender can foreclose and take the house from you.
You seem to be looking for a scenario where you can get cash cheap without taking any risk -- sorry, there's no such thing as cheap cash without risk. If you don't want risk, you're going to have to give an investor a big chunk of your profits to compensate for HIS risk.
Rental Property Investor · Fitchburg, WI · Member since 2016 · 91 posts · 60 votes
9y
This is why it's good to have multiple exit strategies.
If the market crashes, could it be turned into a rental? Or you could try to protect yourself from a limited downturn by ensuring your profit margins are high enough to at least break even.
How long do you think the flip will take? Do you have specific concerns about your market and, if so, is there anything you can do to mitigate them?
It is July, and markets around here really cool off with the cool air of winter.
As far as financing goes, maybe look at finding an investor for that first deal as well. Have them finance part of it so you still have capital to put down on the second deal. You could find someone else in your market with more experience and see about doing a joint venture
There are investors and there are lenders. Investors (also called "equity investors") invest money, get a percentage ownership in the project and a percentage of the profits (or losses). Lenders lend money, get no ownership, but receive a fixed return on their loan.
An example of an equity investment might be someone investing 100% of the project funds for 60% of the profit. In this case, if the deal earns $20,000 in profit, the investor gets $12,000 of that profit. If the deal loses money, typically the investor eats the loss (though a smart investor might negotiate a split of the losses instead).
An example of a loan might be what you suggest above -- 12% APR for some fixed period of time. In this case, typically the house is used as the collateral for the loan, so if you don't have the ability to repay (for example, you can't sell for enough to repay the lender and can't come up with the additional cash on your own), the lender can foreclose and take the house from you.
You seem to be looking for a scenario where you can get cash cheap without taking any risk -- sorry, there's no such thing as cheap cash without risk. If you don't want risk, you're going to have to give an investor a big chunk of your profits to compensate for HIS risk.
I think what I'm looking for is a loan, but not through a company, but from an individual.
I suppose we could agree that if I can't afford to pay him his monthly payments, that he gets possession of the house. I would have to think about this to see what it actually means as far as my risk.
And, yes, I am looking for a $0 down loan, which is why I can't go through any traditional lender of HML for this purpose.
Flipper/Rehabber · Alexandria, VA · Member since 2014 · 461 posts · 262 votes
9y
You are looking for a private money lender to give you a loan for a fixed interest rate. You will probably need to sign a Promissory Note and give him a Deed of Trust on the property.
Also, you will likely need to come up with between 25%-35% of the total cash needed.
Rental Property Investor · Knoxville, TN · Member since 2011 · 701 posts · 531 votes
9y
Takes money to make money. Once you have money and/or experience you can get to the no money down stuff people balk about but nobody other than friends or family is going to take on 100% of the risk in the beginning. As J mentioned, less risk = less return.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
9y
Patrick Philip You can ask yourself this, will you give me your money and i'll do my first flip, it goes good i'll give you 12%, if it goes down the drain I'll write you a nice sorry letter in a scented paper with whatever is left after all expenses are paid?
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
9y
Why would anyone give you a zero down loan when there are thousands of people with decades of experience out there willing to pay market rate? I'd suggest you find one of THOSE people and ask to work with them either for free or at a very reduced rate in order to get some experience under your belt.
Patrick Philip You can ask yourself this, will you give me your money and i'll do my first flip, it goes good i'll give you 12%, if it goes down the drain I'll write you a nice sorry letter in a scented paper with whatever is left after all expenses are paid?
Yea I know, I'd have to give them the house. This would be easy if there was one investor, but might be difficult if more than one person loaned me money for a given project.
Why would anyone give you a zero down loan when there are thousands of people with decades of experience out there willing to pay market rate? I'd suggest you find one of THOSE people and ask to work with them either for free or at a very reduced rate in order to get some experience under your belt.
Flipper/Rehabber · Montgomery, NY · Member since 2016 · 2k+ posts · 1k+ votes
9y
@Patrick Philip I agree with @J Scott, I would worry about getting one house under your belt prior to going after as many as you can. Have you made any offers? Have you made 10 offers? Have you made 50 offers? Until you start flipping houses, I wouldn't worry about flipping as many as you can!
@Patrick Philip I agree with @J Scott, I would worry about getting one house under your belt prior to going after as many as you can. Have you made any offers? Have you made 10 offers? Have you made 50 offers? Until you start flipping houses, I wouldn't worry about flipping as many as you can!
In addition, there was another thread by Patrick where it sounds like he has his first deal, but based on the questions he's asking, it doesn't sound like he really understands the basics of getting it done. Trying to do multiple projects before fully understanding the mechanics is a recipe for disaster...
You need to start small to create your system and develop your own credibility. When I started I partnered on my first two projects to develop a plan and build my own credentials. I use private money for my buy n holds and pay the interest at the end of the project (debt investors). On my flips I create a LLC and they are equity partners splitting the profit. There are never any guarantees in this business. If you can't sell the flip what are my options. Rent, lease option, etc. Have more then one exit plan for the unknown.
@Patrick Philip I agree with @J Scott, I would worry about getting one house under your belt prior to going after as many as you can. Have you made any offers? Have you made 10 offers? Have you made 50 offers? Until you start flipping houses, I wouldn't worry about flipping as many as you can!
In addition, there was another thread by Patrick where it sounds like he has his first deal, but based on the questions he's asking, it doesn't sound like he really understands the basics of getting it done. Trying to do multiple projects before fully understanding the mechanics is a recipe for disaster...
Oh man is this the truth. I tried to do my first 2 rehabs simultaneously and I'm going through hell right now.
And to answer the OP - the collateral is the property they are lending you money for? Is that the question?
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
@Patrick Philip I think you're putting the cart before the horse. I'd hazard to say that 99% of people on BP "want to do as many deals as they can" or "want to own as many units as possible" or...or...or. So far it doesn't look like you've completed the first one yet and given yourself a rate-of-return. Much less completed a 2nd flip/rehab and given an invest __% return. Much less completed 2+ rehabs at a time to give yourself or investors __% return. Consequently, I can't even posit the interest rate that I'd want to see if I was a lender for a flipper with (so far) zero track record and no skin in the game. It's just a nightmare scenario. You have way more fiscal incentive to make sure Flip #1 goes well and far less to ensure that Flip #2 (where my money is) goes well. You have principal capital at stake in one and none in the other. You keep all of the profit is Flip #1 and potentially have to share the profit in Flip #2.
When you do end up selling Flip #1 (hopefully for a profit) you probably want to divide that capital so you have skin-in-the-game with Flip #2 and Flip #3. You can approach the same lender about partnering on Flip #2 and Flip #3 or go to different lenders. At least in those scenarios you have money at risk in any deal you expect a lender to put their capital at risk in as well.