House Flipping- LOC or Conventional Financing to an LLC

3 Replies

Hello everyone,

Some of you may have seen my posts about a month ago looking to get into a Duplex in a Condo Association that had questionable financials. Decided to not go that route, and instead partner with a few friends and we are currently working on the Articles of Organization and Operating Agreement for the LLC. One partner is a lawyer which has helped significantly.

We are investing in Maryland , Baltimore to Annapolis Region. Will be house flipping properties at first, then eventually buy and holds.

We've vetted many banks in the area and are down to two local banks that have different philosophies on how we should do flips.

Bank 1:

Conventional financing- 20% down, interest only for 12 months with a fixed rate of 5 1/2%. Will fund 80% of home and 100% of improvements. Fund improvements on a draw schedule. For cosmetic repairs our local bank loan officer will inspect herself, which should keep costs down. Deals under $250k our lender only needs to go to committee after underwriting, which supposedly takes less time. We will only be borrowing less than this dollar amount.

Bank 2:

LOC secured by Real Estate, Investments or other type of liquid asset. Rate is prime + .5 to 1.5% depending on financial strength, floating interest rate, but that can be negotiated for a fixed rate if financials are strong enough. Interest only renewed annually.

I see advantages in the LOC to be able to close on houses faster, and be a "cash buyer". No underwriting necessary and no draw schedule with inspections after each rehab. Disadvantage is putting primary residence up as collateral, but we may have enough cash in checking accounts to use that instead. Also, having a floating interest rate isn't great if we sit on the house for some time.

Anyone have advice on which strategy to go? Any guidance is appreciated. Thank You.

Forgot to mention this will be a new LLC, no past credit history. It didn’t seem to be a problem for the banks as they will just dig into our personal financials.

Anyone have experience in using these two financing methods for fix and flips? Trying to understand if I’m missing some advantages/ disadvantages.

@Ken Nyczaj Happy New Year!! Hope your new investing year is going well. I will give you what I personally think and obviously I think each person has to consider what is best for them. You say the LOC you would have to put up your personal residence as collateral and for me because this business could got sideways on a dime I don't think I would be willing to do that. I am always thinking worst case and if it all went up in flames do you really want your own personal residence on the hook. I personally think you shouldn't be investing in something you are not willing to put some skin into and the fixed 5.5% is as cheap of money as your gonna get and if you put 20% down and it all goes south well you lost your 20% that is reasonable. I have a local lender who gives master line of credit but basically conventional loan that I can using for fix n flips. They did all the financial checks and got approved for a good amount but I don't have to put up any personal collateral. I think your conventional has great terms and they seem like they are willing to work with you guys so why go with someone who has a floating interest rate, we all know rate hikes are happening this year, and they are gonna make you put your house up. Hope some of my perspective helped. Hope to see you posting about your deal!

@James A. Thank you for your response. One of the assets that could be used as collateral would be a primary residence, but it doesn't have to be. Marketable securities, checking accounts, savings accounts could also be used as collateral to secure the LOC. I'm sure every business partner would have an issue putting their own house on the line.

Not having to put up any personal collateral on a LOC is great, we unfortunately weren't offered that.

The floating interest rate is unfortunate, but it is negotiable if financials are strong enough. All this being said, I see it as a huge advantage to close on deals faster with a LOC in a competitive market, IF us four business partners can agree on using other assets besides primary residences as collateral.

I'll keep you updated as we get our personal financials under review in the next two weeks.