How do investors finance holding cost for flips?

Rehabbing & House Flipping
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How do investors finance holding cost for flips?

Mason Gibbs
Member since 2020 · 9 posts · 4 votes

I am looking to flip my first property. I have a good deal with a potential profit of ~$30K. I have enough for the downpayment and to get started with a hard money lender but my concern is the holding cost.

Here’s the deal:

Purchase: $165K

Rehab: $80K

ARV: $340K

Down payment: $40K

Cash available:$25K to get constitution started and misc items before the first hard money installment

What’s holding me back from starting:

Holding Cost: $3600 per money

Holding time: 6 months = $21,200

I have things lined up for all the upfront cost but my concern is the holding costs. How do most people finance the holding cost? Do you use a line of credit? Or are the costs too high and I need to reevaluate the deal.

Again this is my first deal so I maybe missing something. Any advice would be greatly appreciated.

Thank you.

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Jordan Woolf
Flipper/Rehabber · Huntsville, AL · Member since 2019 · 117 posts · 57 votes
5y

@Mason Gibbs find a local bank to work with. I have one that I use that will waive the inspection and appraisal if I bring them a good enough deal. I put 20% down with no points and make interest only payments.

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  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    5y

    I don't think you're calculating holding cost correctly. That looks crazy high. 

    1Reply
  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    5y

    @Mason Gibbs $3600 is really high, how are you getting this figure?

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    0Reply
  • Andre TaylorPro Member
    Rental Property Investor · Chicago, IL · Member since 2017 · 219 posts · 180 votes
    5y
    WOW thats high.....instead of hard money talk to a local bank and get a construction loan.. much better rates
    1Reply
  • Mason Gibbs
    OP
    Member since 2020 · 9 posts · 4 votes
    5y

    @Matthew Crivelli 

    Here's my calculation

    $2130 - Hard Money Loan Payment

    $459 - Property Tax

    $50- Insurance 

    $200 - Utilities

    $300 -  Accounting & Misc fees

    Please let me know if I am missing something or if I am being too conservative. Any advice would be appreciated.

    0Reply
  • Mason Gibbs
    OP
    Member since 2020 · 9 posts · 4 votes
    5y

    So sorry my calc was off, the total is really = $3139, is that still high?

    0Reply
  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    5y

    @Mason Gibbs When i input the numbers the monthly interest only payment comes in at $1,285. That's a 12 months I/O loan at 11.49% What the rate you were quoted?

    [email protected]413-348-8346
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  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    5y

    *** $1340 per month at 11.49

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  • Mason Gibbs
    OP
    Member since 2020 · 9 posts · 4 votes
    5y

    @Matthew Crivelli

    The rate I was quoted was 11.99%  over 6 months. I must be doing my calculations incorrectly. 

    0Reply
  • Peter MckernanBusiness Member
    Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
    5y

    @Mason Gibbs should be in the ballpark of $11500-$13,500 (total for the 6 months) for the holding costs and if you are not I would look else where for the cost of the hard money and points they are charging. 

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    @Peter Mckernan @Matthew Crivelli From his numbers, he’s borrowing $205k....so at 12%, $2k/mo interest. 
    @Mason Gibbs you don’t typically pay the property taxes monthly, but yearly. Depending on when they are paid there, you’ll get a credit or have to pay a pro rats share of the taxes st closing. 

    0Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    5y

    @Mason Gibbs no offense meant, and congratulations on diving in, but it seems like your position is a little thin if you're worried about holding costs.  Thoughts?  You need reserves in case something goes wrong.

    1Reply
  • Mason Gibbs
    OP
    Member since 2020 · 9 posts · 4 votes
    5y

    @Wayne Brooks

    Thanks for the info on the property tax, I will look into how that changes my holding costs. Also thanks for the calc on the loan payment that lines up with what I have. 

    0Reply
  • Mason Gibbs
    OP
    Member since 2020 · 9 posts · 4 votes
    5y

    @Nicholas L.

    No offense taken. Your point is completely valid. I do have some cash reserves but saw the $21K for holding cost and thought maybe I am missing something so that 's where my question came from. I was wondering how others financed their holding cost while keeping their cash reserves. 

    2Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    5y

    @Mason Gibbs got it, glad you have reserves.

    1Reply
  • Jordan Woolf
    Flipper/Rehabber · Huntsville, AL · Member since 2019 · 117 posts · 57 votes
    5y

    @Mason Gibbs find a local bank to work with. I have one that I use that will waive the inspection and appraisal if I bring them a good enough deal. I put 20% down with no points and make interest only payments.

    4Reply
  • Brett Tvenge
    Flipper/Rehabber · Phoenix, AZ · Member since 2018 · 268 posts · 152 votes
    5y

    @Mason Gibbs straight cash homey

    2Reply
  • Will Gebbie
    New to Real Estate · Morristown, NJ · Member since 2020 · 17 posts · 26 votes
    5y

    @Mason Gibbs

    Maybe you can find a cash buyer in your area who will partner on the deal with you in exchange for the down payment or maybe the access for private money for the down payment. To find a cash buyer you can go to the comps that you used that are flips and ask the listing agent who the flipper was or if he knows and investors in that area. They should be more than willing to help you out and solve your dilemma.

    2Reply
  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    5y
    Originally posted by @Nicholas L.:

    @Mason Gibbs no offense meant, and congratulations on diving in, but it seems like your position is a little thin if you're worried about holding costs.  Thoughts?  You need reserves in case something goes wrong.

    Yes. If he goes slightly over budget and ends up having to hold it for 10-12 months he'll be in the red.

    1Reply
  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    5y

    @Wayne Brooks I don't think you are factoring out the down payment. Unless it's 100% then you would be correct yes.

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    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y
    Originally posted by @Matthew Crivelli:

    @Wayne Brooks I don't think you are factoring out the down payment. Unless it's 100% then you would be correct yes.

     His posted numbers....

    Purchase $165k

    Rehab.      80k

    Down payment 40k

    165+80-40=205k

    0Reply
  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    5y

    @Wayne Brooks What the difference is, is when I price things out I'm going off the initial advance because you only have to pay on the rehab money once it has been drawn. So the payment starts low and goes up as you draw. So you are correct Wayne!

    [email protected]413-348-8346
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    1Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y
    Originally posted by @Matthew Crivelli:

    @Wayne Brooks What the difference is, is when I price things out I'm going off the initial advance because you only have to pay on the rehab money once it has been drawn. So the payment starts low and goes up as you draw. So you are correct Wayne!

    And....I think some HML’s actually charge interest on the full rehab funds, or try to, because “they are set aside for you”...

    1Reply
  • Michael Ward
    Real Estate Broker · Fayetteville, AR · Member since 2018 · 75 posts · 50 votes
    5y

    I second the recommendation of speaking with a local bank for a construction loan. It should be much cheaper. But also, if you budget for the holding costs on the front end and include them as part of the overall costs, the lender may allow payments to be covered by the loan. Seems odd at first, but I've done it. As long as your overall costs, including holding costs, are below the threshold of the loan amount. I often see loans of up to 80-85% of ARV

    1Reply
  • Zach WesterfieldPro Member
    Warner Robins, GA · Member since 2016 · 244 posts · 167 votes
    5y

    @Mason Gibbs yes that is expensive money, but to answer your original question, I estimate holding costs up front and add to the cost do the project. So I have purchase price (including closing) + rehab + holding costs + selling costs (agent commission, closing costs) = project cost. No matter how I raise the money or what it costs, I raise that amount up front. Usually a combination of bank loans, private loans, personal reserves and 0% interest credit cards. If you are new don’t factor a holding period less than 6 months. If it’s a decent sized rehab go higher than that

    1Reply
  • Mason Gibbs
    OP
    Member since 2020 · 9 posts · 4 votes
    5y

    @Michael Ward thanks for this information I wanted to go to a local bank but the seller wants to close fast and needs cash or hard money. I am thinking maybe this is not a good deal for me and I should research more on the hard money loans and save more to further build up my cash reserves.

    0Reply
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