Paying cash vs Financing on a Flip

5 Replies

Hey Javier, Paying cash will save you a good amount of money on fees/interest. Aside from that, you will usually see a discount on the purchase with a cash offer as opposed to financing. The rehab will certainly go quicker using cash as well. When you draw funds for the rehab, you'll have to stop for inspections and wait for funding. You're usually looking at about a week or so for that process. While it doesn't sound like much time, if you submit 4 draw requests, it adds at least a month to your rehab time...that's an extra month in taxes, insurance, maintenance, interest, etc... it starts to add up quick. Time is just as important as the profit in a flip. Don't discount that part of it. Good luck!

If you have a choice, cash gives you a greater margin for error since you are not paying fees, points and interest.  It depends on your market.  In my market, flip candidates sell from $750,000 to -$1,250,000 so financing is a necessary evil unless you are sitting on boatloads of cash.

If you have the funds to pay cash that is an awesome alternative, and you will save yourself the money in the long run. However, you have to be willing to tie up a lot of money for a much longer period. Assuming you have 100k liquid and want to buy a house for 90k with 10k in reserves. You would save yourself a few hundred dollars each month from paying for the mortgage. However, you also would not be able to spend the 67.5k that would have been financed with the standard mortgage. So if you could better appropriate those funds into 2-3 properties. For example, 22.5k down on 3 properties plus 10k in reserves for each puts you just under 100k invested but you now own 3 properties where you pay for debt service on each one. It is definitely something to consider but I hope it works out for you!

@Javier Grimaldo I too use cash for my flips. But, mortgages are a good option if you are wanting to grow beyond what your current finances allow. Scaling is generally the only advantage of mortgages, whether that be through more projects, or larger projects. The downsides are lower margin of error, monthly interest expense, slowed timelines for purchase (assuming bank debt, not HML) and through draw process.

Originally posted by @Javier Grimaldo :

Hey Fam! I need some guidance yet again. Is better to finance a house for a flip or to pay cash? Are there any benefits to either or?

Money is very cheap right now so you are much better of using bank financing and doing more deals vs tying cash up in one deal if that is your goal. Also you do not need to stop progress for draw inspections so that will not add to the timeline. You plan ahead for draws. Also the contractor will float the costs until the draw is approved as they do not get paid until work is completed anyway. If you are managing the project and paying the subs you can float the costs until the draw is issued.